UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2003
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
____________ to ____________
Commission file number 000-50614
ORAGENICS, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
FLORIDA 59-3410522
------------------------------ --------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
12085 RESEARCH DRIVE, ALACHUA, FLORIDA 32615
--------------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
(386) 418-4018
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock, par
value $.001
per share
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB [ ]
The revenues of registrant for the fiscal year ended December 31, 2003
were $0.00.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 12, 2004 was approximately $18,619,564 based upon a
last sales price of $3.45 as reported by TSX Venture Exchange.
As of March 12, 2004 there were 13,407,530 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement for its 2004
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Form 10-KSB Report except with respect to information specifically
incorporated by reference in this Form 10-KSB Report, the Definitive Proxy
Statement is not deemed to be filed as a part hereof.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
TABLE OF CONTENTS
PART I
PAGE
Item 1. Description of Business...................................................................................3
Item 2. Description of Property...................................................................................17
Item 3. Legal Proceedings.........................................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.......................................................17
PART II
Item 5. Market for Common Equity and Related Stockholder Matters..................................................18
Item 6. Management's Discussion and Analysis or Plan of Operation.................................................20
Item 7. Financial Statements......................................................................................35
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................35
Item 8A Controls and Procedures...................................................................................35
PART III
Item 9. Directors and Executive Officers of the Registrant........................................................37
Item 10. Executive Compensation...................................................................................37
Item 11. Security Ownership of Certain Beneficial Owners and Management...........................................37
Item 12. Certain Relationships and Related Transactions...........................................................37
Item 13. Exhibits and Reports on Form 8-K.........................................................................37
Exhibit Index......................................................................................................37
Item 14. Principal Accountant Fees and Services...................................................................39
Signatures.........................................................................................................55
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
This description contains certain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from the results discussed in the forward-looking statements as a result of
certain of the risks set forth herein and elsewhere in this Form 10-KSB. The
Company assumes no obligation to update any forward-looking statements contained
herein.
OVERVIEW
Oragenics, Inc. was incorporated under the laws of Florida on November 6,
1996. We commenced operations in 1999.
We, Oragenics, Inc., are a biotechnology company aimed at adding value to
novel technologies and products sourced from innovative research at the
University of Florida and other academic centers. Our aim is to in-license and
develop products through human proof-of-concept (Phase I or II of the FDA's
regulatory process discussed below) prior to partnering with major
pharmaceutical, biotechnology or healthcare product firms for advanced clinical
development and commercialization. We have generated no revenues from operations
during the last two years. All of our revenues have been from a sponsored
research agreement which has expired; none have been from sales.
We are currently developing the following products, each of which
addresses potential market opportunities:
- - REPLACEMENT THERAPY is a single, painless topical treatment that has
the potential to offer life-long protection from most tooth decay. We
expect to initiate Phase I safety studies with this product during
2004.
- - MUTACIN 1140 is a novel antibiotic with activity against essentially
all Gram-positive bacteria including vancomycin-resistant
Staphylococcus aureus. Researchers have not succeeded to-date in
demonstrating bacterial resistance to this antibiotic. We are currently
in early preclinical stages of development for Mutacin 1140.
- - "PROBIOTIC" TECHNOLOGY employs naturally occurring beneficial bacteria
to promote oral and periodontal health. Probiotics are widely employed
in Japan and Europe and acceptance in the United States is growing.
Such products may be marketed as "health supplements" without the need
for regulatory filings, offering the opportunity for near-term
commercialization.
- - "OTHER" TECHNOLOGIES include other technologies that we may develop
from our research and development activities or that we may license,
including our recently licensed technology called in vivo induced
antigen technology that enables the simple, fast identification of
novel and potentially important gene targets associated with the
natural onset and progression of infections, cancers and other diseases
in humans and other living organisms, including plants.
We amended our articles of incorporation on May 8, 2002, in order to
change our name from Oragen, Inc. to Oragenics, Inc. and to increase our
authorized capital from 100,000 shares of common stock to 100,000,000 shares of
common stock and 20,000,000 shares of preferred stock. Our registered office is
located at 4730 S.W. 103rd Way, Gainesville, Florida 36208, and our headquarters
are located at 12085 Research Drive, Alachua, Florida 32615.
OUR BUSINESS STRATEGY
For our business to become profitable and competitive, our technologies
must be approved for production and sale by the Federal Food and Drug
Administration ("FDA"). Our present strategy for financing the clinical trials
which will be necessary as part of the FDA approval process involves conducting
3
the research and development work in respect of our technologies through Phase I
clinical trials. Assuming we complete Phase I clinical trials successfully, we
intend to consider the sublicense of our licensed, patented technologies to
pharmaceutical companies, which would be responsible for completing Phase II and
III clinical trials and for undertaking the new drug applications. We anticipate
that such sublicenses would provide for payment of fees to us, a portion of
which would be payable upon execution and the balance of which would be payable
upon achievement of product development milestones, and for payment to us of
royalties from sales. This strategy would serve to avoid the high costs of Phase
II and III trials we would otherwise have to pay, and generate revenues from our
technologies sooner than if we conducted those trials ourselves. There can be no
assurance that we will be able to enter into such sublicenses on terms favorable
to us, or at all.
If we are successful in sublicensing one or more of our technologies, we
intend to seek to license promising new technologies in our fields of expertise.
We hope to be able to obtain licenses of other technologies firstly from the
University of Florida, with which a number of our directors and officers have a
strong relationship, and secondly from other universities.
OUR TECHNOLOGIES
REPLACEMENT THERAPY
Background. Our licensed, patented replacement therapy technology is the
fruit of 25 years of research by our founder and chief scientific officer, Dr.
Jeffrey Hillman. In the course of his research at Forsyth Dental Center and the
University of Florida, Dr. Hillman isolated a strain of a species of bacteria
naturally resident on teeth with the ability to out-compete and displace other
strains of that species. The strains of that species typically found on teeth
produce lactic acid, which causes tooth decay. Dr. Hillman, through recombinant
DNA technology, succeeded in replacing a gene in the strain of bacteria with the
ability to out-compete. That gene is responsible for producing lactic acid. Dr.
Hillman replaced it with a gene that causes that strain to produce other
harmless, non-decay-causing substances. The University of Florida has obtained a
patent in respect of that genetically altered strain, and we have obtained an
exclusive license of that patent from the University of Florida. Our replacement
therapy technology may prove to be a new treatment for human tooth decay.
In 2000, we entered into a sponsored research agreement with respect to
our replacement therapy technology. Under that agreement, we were paid $357,787
in respect of research and development costs. The agreement allowed our sponsor
the exclusive option to negotiate a sublicense of our replacement therapy
technology. Our sponsor did not exercise the option, and it has expired. We have
had no further discussions or negotiations with the sponsor since the agreement
expired.
Market Opportunity. The dental care market in the United States is
estimated to be $58 billion annually. Of this sum, a considerable portion is
related to tooth decay. Since the introduction of fluoride, no significant
technology has been introduced to prevent tooth decay. Our licensed, patented
replacement therapy technology may prove to be the first new treatment for human
tooth decay in many years.
Technical Background. Many different types of bacteria reside in
everyone's mouth. Streptococcus mutans (S. mutans) is a bacteria that resides on
nearly everyone's teeth. This bacteria converts sugar that we eat into lactic
acid. Lactic acid erodes the tooth's enamel and causes the great majority of
tooth decay. Our replacement therapy technology consists of a genetically
modified strain of S. mutans that does not produce lactic acid. Our strain of S.
mutans produces tiny quantities of a substance known as mutacin 1140, which
allows our strain to out-compete the strain of S. mutans which is naturally
resident on a person's teeth. Our strain eliminates the resident strain of S.
mutans and replaces it in the mouth. It will be administered as a pharmaceutical
composition by dentists during office visits. Because our strain out-competes
resident strains on teeth, one treatment may last for a long time. Preliminary
studies conducted by our Chief Scientific Officer, Dr. Jeffrey Hillman have
shown our Replacement Therapy technology to be effective and non toxic in
animals.1 We hope that further testing will confirm these results. We have not
yet conducted human clinical trials.
4
Animal Studies. Dr. Jeffrey Hillman, our Chief Scientific Officer, and
others have conducted animal studies of the effectiveness of our replacement
therapy technology in rats at the Forsyth Institute, the University of Florida
and our company from 1976 to 2002.2 In the most recent of these studies, our
strain of S. mutans and wild-type strains of S. mutans were grown in culture in
the presence of sugar. After careful analysis of the culture, it was found that
the wild strain made lactic acid almost exclusively from the metabolism of
sugar. It also made very small amounts of other acids and the non-acidic
compounds, ethanol and acetoin. By contrast, our strain made mostly the
non-acidic compounds, ethanol and acetoin, from metabolism of the sugar. Our
strain produced absolutely no detectable lactic acid. We then infected 2
identical groups of conventional rats with either the wild strain or our strain.
A third identical group of rats was not infected and served as a control group.
After feeding the rats a diet containing sugar for 8 weeks, the teeth of the
rats were carefully inspected to determine their incidence and severity of tooth
decay. It was found that animals infected with our strain had no more tooth
decay than did the control group animals. Both the group infected with our
strain and the control group had only half the tooth decay experienced by the
wild strain.
Dr. Hillman and others also conducted a 6 month toxicity study in rats.
They infected a group of rats with our licensed, patented strain of S. mutans.
No gross or histological side effects were found during colonization of the rats
over this prolonged period.
These studies provide scientific evidence of the effectiveness of our
licensed, patented strain of S. mutans in preventing tooth decay, and of its
non-toxicity, in animals.
Manufacturing. The manufacturing methods for producing our strain of S.
mutans to be used in our replacement therapy technology will be standard
fermentation methods. These involve culturing bacteria in large vessels, and
harvesting them when mature by centrifuge or filtration. The cells will then be
suspended in a pharmaceutical medium appropriate for application in the human
mouth. These methods are commonplace and readily available within the
pharmaceutical industry. We intend to consider sublicensing our replacement
therapy technology to a pharmaceutical company. If we are successful in doing
so, the sublicensee company will manufacture and market our replacement therapy
technology.
Method of Administration. We expect, if we are successful in obtaining the
necessary regulatory approvals, that the product based on our replacement
therapy technology will be a liquid rinse which will be applied to a patient's
teeth by a dentist. We expect that it will be available by prescription only.
Competition. We do not know of any direct competitors with our licensed,
patented replacement therapy technology. We understand that certain companies
have been researching vaccines to inhibit the growth of S. mutans. However,
every vaccine has drawbacks, including induced-heart-reactive antibodies in
animals. Major studies would be required to establish that elimination of
naturally occurring bacteria such as S. mutans from the mouth will not create
serious, unintended consequences. Academic institutions, government agencies and
other public and private research organizations may also conduct research, seek
patent protection and establish collaborative arrangements for discovery,
research and clinical development of technologies and products similar to ours.
Many of our potential competitors in these areas have research and development
capabilities that may allow them to develop new or improved products that may
compete with products based on our technologies.
Any product based on our replacement therapy technology will compete
against traditional oral care products used to combat tooth decay. These
products include tooth sealants and fluoride treatments administered by
dentists, and fluoride based toothpastes. Some of our competitors will include
Colgate, Procter & Gamble, Unilever, GlaxoSmithKline and Dentsply. All of these
companies are much larger and have far greater technical and financial resources
than us. It is our intention to compete in the market for dental care products
by obtaining a strategic partner with a dedicated sales force in the dental
office market. There can be no assurance we will be able to obtain any such
partner. If we are unable to secure such a strategic partner, we will seek to
enter into a contract manufacturing arrangement with a pharmaceutical
manufacturing company, and to enter into distribution agreements with dental
product distributing companies. There can be no assurance we will be able to
enter into any such arrangement.
1 Hillman et al, Construction and Characterization of an Effector Strain
of Streptococcus mutans for Replacement Therapy of Dental Caries,
Infection and Immunity (2000) Vol.68, No. 2.
2 Hillman et al, Construction and Characterization of an Effector Strain
of Streptococcus mutans for Replacement Therapy of Dental Caries,
Infection and Immunity (2000) Vol.68, No. 2.
5
License. We hold our patented replacement therapy technology under license
from the University of Florida Research Foundation, Inc. The license is dated
August 4, 1998. It was amended on September 15, 2000, July 10, 2002, September
25, 2002 and March 17, 2003. It provides us with an exclusive world wide license
to make, use and sell products and processes covered by Patent No. 5,607,672.
This patent covers the genetically altered strain of S. mutans which does not
produce lactic acid, a pharmaceutical composition for administering the
genetically altered strain, and the method of preventing tooth decay by
administering the strain. The University of Florida Research Foundation, Inc.
has reserved for itself and the University of Florida the right to use and sell
such products and services for research purposes only. Our license also provides
the University of Florida Research Foundation, Inc. with a license, for research
purposes only, to any improvements we make to the products and processes covered
by the patent. Our license is for the period of the patent, subject to the
performance of terms and conditions contained therein. The patent is dated March
4, 1997, and will expire on March 3, 2014.
Under the license, we have entered into an Equity Agreement with the
University of Florida Research Foundation, Inc. under which we have issued as
partial consideration for our license 599,940 shares of our common stock which
is 4.5% of our total outstanding shares as of December 31, 2003. We are
obligated to pay 5% of the selling price of our products to the University of
Florida Research Foundation, Inc. If we sublicense the license, we are obligated
to pay 20% of all amounts we receive from the sublicensee to the University of
Florida Research Foundation, Inc. On December 31, 2005 and each year thereafter
we are obligated to make a minimum royalty payment of $50,000. We spent at least
an aggregate of $600,000 in 2003 and are obligated to spend or cause to be spent
an aggregate of $1,000,000 in each calendar year following 2003 on the research,
development and regulatory prosecution of our replacement therapy and mutacin
1140 technologies together, until a product which is covered wholly or partially
by the claims of the patent, or is manufactured using a process which is covered
wholly or partially by the claims of the patent, is sold commercially.
If we fail to make these minimum expenditures, the University of Florida
Research Foundation, Inc. may terminate our license.
We must pay all patent costs and expenses incurred by the University of
Florida Research Foundation, Inc. for the preparation, filing, prosecution,
issuance and maintenance of the patents beyond $105,000. We have paid $100,000
to UFRF for the patent expenses already incurred.
We have agreed to indemnify and hold the University of Florida Research
Foundation, Inc. harmless from any damages caused as a result of the production,
manufacture, sale, use, lease, consumption or advertisement of the product.
Further, we are required to maintain liability insurance coverage appropriate to
the risk involved in marketing the products. We have obtained liability
insurance in the amount of $1,000,000. This policy expires on June 24, 2004.
There is no assurance that we can obtain continued coverage on reasonable terms.
Intellectual Property Matters. We do not hold any patents on our
replacement therapy technology. Our rights to this technology flow from our
license with the University of Florida Research Foundation, Inc.
We received notification from B.C. International Corporation on July 29,
2002 that a gene utilized in our licensed, patented strain of S. mutans
infringes a patent which it holds under a license. Their notification did not
state that they intended to pursue legal remedies. Management of our company
does not believe the gene in question infringes that patent. We have sent them
correspondence setting out our position. We have heard nothing further from
them.
6
Regulatory Status. We submitted an investigational new drug application
for our replacement therapy technology in 1998. The FDA placed our application
on clinical hold on December 3, 1998 pending resolution of concerns related to
transmission of our genetically modified strain of S. mutans by those treated
with it to others who have not been treated with it, possible reversion of our
strain to an acid-producing strain, and the possibility of genetic transfer of
the ability to produce mutacin 1140 from our strain to other forms of bacteria
which occur naturally in human beings. The clinical hold order was issued
because the FDA believed our application did not contain sufficient information
to allow it to assess the risks to the subjects in our proposed human clinical
studies. We may not commence Phase I human clinical studies of our replacement
therapy technology until the clinical hold is lifted. We have amended our first
investigational new drug application three times to respond to the FDA's
concerns. We filed a new investigational new drug application in March of 2003.
This investigational new drug application has also been placed on hold until we
satisfy the FDA's safety concerns. As a result of the research and development
work we have done to respond to the FDA's concerns, we have gained valuable
knowledge about the use and administration of our replacement therapy
technology.
On October 23, 2000, we met with representatives of the FDA's Center for
Biological Evaluation and Research ("Center") to discuss their concerns. At that
meeting, we and the Center's representatives discussed design of the preclinical
experiments which the FDA would require in response to the clinical hold. In
order to address the FDA's concerns, we developed a modification of our
licensed, patented strain of S. mutans. The modified strain has a nutritional
requirement for a substance known as D-alanine. If D-alanine is withdrawn from
its diet, it will die. Conceptually, because of the nutritional requirement of
our modified strain, if it is transmitted to those who have not been treated
with it, it will die, unless D-alanine is administered regularly. D-alanine will
be supplied to the trial subjects with mouth rinse. D-alanine is not normally
found in the human diet, which is why it has been selected for our study as a
potential recall mechanism. The maintenance system will be by regular mouth
rinse, the amount and frequency of which will be determined in the clinical
trials. In the rat animal model used, total eradication was not achieved even
when D-alanine was removed from the diet. We hypothesize this occurred because
the rats were able to feed our strain with D-alanine obtained through
cross-feeding from bacteria in their feces, which the rats consumed. We
commenced these studies in 2001. The results of the studies can be summarized as
follows. The modifications to produce D-alanine dependence had no effect on the
modified strain's production of lactic acid or mutacin 1140, which suggests that
the modified strain compares identically to our original strain with respect to
its ability to out-compete natural strains and non-production of tooth decay. No
adverse side effects were observed in laboratory rats infected with the modified
strain, and exposed to D-alanine in their drinking water, for five months. The
potential for reversion of the modified strain to lactic acid production and for
transmission of the modified strain to those not treated with it were
demonstrated to be very low. Transfer of DNA from our strain to other strains
was shown to be statistically extremely low because of the genetic modification
made to prevent any DNA transfer.
On March 19, 2003, we submitted a new investigational new drug ("IND")
application to the FDA in respect of our newly modified strain of our licensed,
patented strain of S. mutans. It incorporates our previous investigational new
drug application by reference. Our new investigational drug application refers
to an ongoing eradication animal study and indicates that results from that
study will be submitted as an amendment when it is complete. On April 18, 2003,
the FDA notified us by telephone that it was placing our new investigational new
drug application on clinical hold. We spoke again by telephone with the FDA on
April 30, 2003. The FDA has indicated that, in order to lift the clinical hold,
it wants certain of the experimental protocols for our human clinical trials
described in our new investigational new drug application redesigned to include
a full physical examination of subjects' spouses, and to include more extensive
testing of subjects' spouses, including six months post-trial follow-up. The FDA
also required additional preclinical animal toxicity studies in which our newly
modified strain of S. mutans and D-alanine were ingested by rats together and
separately, and studies demonstrating total eradication of our newly modified
strain of S. mutans from test animals. The FDA issued a formal letter outlining
its requests on May 15, 2003 and the requested studies were completed in
December 2003. We filed an amendment to our IND with the results of those
studies in January 2004. The FDA's primary safety concern is the theoretical
risk of our strain reverting to acid production or of our strain's DNA being
transferred to other naturally occurring organisms. Until the FDA is satisfied
this theoretical risk is not a safety threat, the FDA will want to see total
eradication of the strain from animals and from clinical subjects following the
first human studies. Before allowing our clinical study to proceed, the FDA will
submit our application and protocol to the FDA's Vaccines and Related Biological
Product Advisory Committee and/or the National Institute of Health's Recombinant
DNA Advisory Committee ("NIH RAC") for their recommendations regarding concerns
of release of the bacteria into the environment. We are scheduled to appear
before the NIH RAC on March 10, 2004.
7
The D-alanine dependent strain was designed to meet the FDA's requirement
for total eradication of the strain in the unlikely event that either of two
adverse events is observed during clinical trials. In particular, if the strain
somehow reacquired the ability to make lactic acid, this would qualify as a
reason to eradicate it from the test subjects. Also, if it is observed that the
strain can be transmitted from treated subjects to untreated subjects, this
would also qualify as a reason to eradicate it. In several rat studies performed
to test if eliminating D-alanine from the diet resulted in eradication, the
strain was reduced significantly in numbers but not totally eradicated. We
hypothesize that the rats continued to supply the strain with D-alanine by
eating their feces. Many bacteria found in feces produce D-alanine naturally.
This route of D-alanine supplementation is not a concern in human subjects. We
expect that the absence of D-alanine in the human diet will enable us to achieve
total eradication of the strain in human subjects by stopping the twice-daily
rinses with D-alanine. The FDA has acknowledged the likelihood of our
hypothesis, but would like us to devise a method that will assure eradication of
the strain in animals. We conducted a study in which animals infected with the
strain have been taken off their D-alanine supplementation and are also being
treated twice daily by topical application of a commercially available
chlorhexidine mouth rinse. The measured levels of the strain fell steadily over
the course of the study to non-detectable levels. On February 5, 2004, the FDA
informed the Company that our IND remained on clinical hold since the FDA still
wants to see total eradication of our strain and has suggested the use of
antibiotic treatments to accomplish total eradication. On February 24, 2004 we
requested a face-to-face meeting with the FDA in early April 2004 to discuss and
resolve their concerns and allow us to proceed with the Phase I clinical trial.
If the FDA removes the clinical hold on our investigational new drug
application, we will be permitted to commence human clinical trials of our
licensed, patented replacement therapy technology. The cost per patient is
estimated at $10,000.
Our patient estimate for each phase of the clinical trial process for the
replacement therapy technology is:
Phase I Combined Phase II/III
24-30 3,000
MUTACIN 1140
Background. Our second licensed, patented technology is mutacin 1140, an
antibiotic peptide which is produced by our strain of S. mutans. It was
discovered by Dr. Hillman in the course of his research into our replacement
therapy technology. It is a broad spectrum antibiotic which has demonstrated
potency, in laboratory studies against all Gram-positive bacteria against which
it has been tested.3 The testing was conducted by Dr. Jeffrey Hillman, our Chief
Scientific Officer and a significant shareholder of our company, together with
others at the University of Florida and at our laboratories in 1998 and 1999.
Introduction to Antibiotics. Before the development of effective modern
antibiotics, serious bacterial infections were as feared as AIDS is today. Since
development of antibiotics, they have been less feared. However, society may
soon be faced once again with the prospect of bacterial and fungal diseases
becoming major causes of death. Resistance to drugs which are effective against
bacterial and fungi is increasing, and at a faster pace than development of
drugs which are effective against them.
Market Opportunity. Since the initial discovery and introduction of
antibiotics some 50 years ago, doctors and researchers have found that bacteria
are efficient at developing or acquiring mechanisms of defense. Until recently,
antibiotic resistance appeared to be a relatively minor nuisance. Drug
manufacturers were confident they could modify the structure of existing drugs
such as penicillins, cephalosporins and tetracyclines faster than bacteria are
able to develop drug resistance. Unfortunately, this has not proved to be the
case. The numbers of drug resistant bacteria are on the rise, and the
development of new treatment options has not kept pace. The single greatest
problem in the use of antibiotics today is resistance by the disease causing
organisms they are targeted against. The Center for Disease Control estimates
that bacteria resistant to known antibiotics cause 44% of hospital infections.
Drug resistant bacterial infections affect approximately 9 million people
annually in the United States, resulting in some 60,000 deaths. Vancomycin,
introduced in 1956, today serves as the last line of defense against certain
life-threatening infections. Unfortunately, certain bacteria have developed
strains which resist even vancomycin. Many experts caution we may soon see the
return of the pre- antibiotic era.
1 Hillman et al, Constructin and Characterization of an Effector Strain
of Streptococcus mutans for Replacement Therapy of Dental Caries,
Infection and Immunity (2000) Vol.68, No. 2.
8
Technical Background. Preliminary in vitro4 laboratory studies conducted
by Dr. Jeffrey Hillman have demonstrated mutacin 1140's effectiveness against
all tested Gram-positive bacteria.5 Gram-positive bacteria are a class of
bacteria that cause a large variety of human infections. We hope further testing
will confirm these results. mutacin 1140 belongs to a small class of antibiotics
called lantibiotics. Lantibiotics differ from other antibiotics because they
contain an unusual amino acid. They are able to kill a wide variety of bacteria
by punching holes in their cellular membranes.
Nisin is a lantibiotic that has been widely used for decades as a food
preservative. We will study mutacin 1140 first for its potential application in
the clinical treatment of various infectious diseases. In laboratory studies it
has been effective at killing a broad spectrum of bacteria, including the
streptococci that cause pharyngitis (strep throat) and pneumonia. It is also
effective against Staphylococci, which cause various sorts of infection.6 At a
later time, we may undertake the further study of mutacin 1140 for use as a food
preservative.
Mutacin 1140 has other properties that indicate its potential usefulness
and acceptance as an antibiotic. The most striking of these is the observation
that these pathogenic bacteria based on testing to date seem to have great
difficulty in becoming resistant to it.7 It is a small, modified peptide that is
expected to be absorbed by an oral route of administration. Preliminary animal
testing conducted by Dr. Hillman indicates that it does not readily provoke an
immune response, indicating that it may not be very allergenic.8
Laboratory Testing. Dr. Hillman and others have conducted laboratory
studies at the Forsyth Institute, the University of Florida and our company to
test the efficacy of mutacin 1140 as an antibacterial agent from 1984 to the
present.9 To test the ability of mutacin 1140 to kill bacteria, standard
microbiological testing methods were employed. Mutacin 1140 was purified and
incorporated into growth medium at different concentrations. This medium was
then inoculated with the bacterium under study, and its ability to grow in the
presence of mutacin 1140 was observed. The minimal inhibitory concentration
(MIC), which is defined as the lowest concentration of mutacin 1140 that was
observed to inhibit growth of the test bacterium, was recorded.
Purified mutacin 1140 was found to have a very broad spectrum of activity.
It was found to kill all Gram-positive bacteria tested at concentrations
comparable to many therapeutically effective antibiotics. The bacteria found to
be sensitive included those responsible for human infections such as
streptococcal pharyngitis ("strep throat"), the predominant type of human
pneumonia, and bacterial endocarditis.
1 Hillman et al, Constructin and Characterization of an Effector Strain
of Streptococcus mutans for Replacement Therapy of Dental Caries,
Infection and Immunity (2000) Vol.68, No. 2.
2 Studies carried out in isolation from a living organism.
3 Wojciehowski, Byers and Hillman, Regulation of Expression of the
Structural Gene for Mutacin 1140 and Characterization of its
Antibacterial Properties (2002), submitted for publication.
4 Wojciehowski, Byers and Hillman, Regulation of Expression of the
Structural Gene for Mutacin 1140 and Characterization of its
Antibacterial Properties (2002), submitted for publication.
5 Wojciehowski, Byers and Hillman, Regulation of Expression of the
Structural Gene for Mutacin 1140 and Characterization of its
Antibacterial Properties (2002), submitted for publication and Hillman
et al, Isolation of a Streptococcus mutans Strain Producing a Novel
Bacterium, Infection and Immunity (1984) Vol. 44, No. 1, pp. 141-144.
6 Wojciehowski, Byers and Hillman, Regulation of Expression of the
Structural Gene for Mutacin 1140 and Characterization of its
Antibacterial Properties (2002), submitted for publication and Hillman
el al, Isolation of a Streptococcus mutans Strain Producing a Novel
Bacterium, Infection and Immunity (1984) Vol. 44, No. 1, pp. 141-144.
7 Wojciehowski, Byers and Hillman, Regulation of Expression of the
Structural Gene for Mutacin 1140 and Characterization of its
Antibacterial Properties (2002), submitted for publication and Hillman
el al, Isolation of a Streptococcus mutans Strain Producing a Novel
Bacterium, Infection and Immunity (1984) Vol. 44, No. 1, pp. 141-144.
9
A particularly interesting feature of mutacin 1140 is that none of the
sensitive species of bacteria tested were able to acquire genetically stable
resistance to purified mutacin 1140. Acquired resistance to antimicrobial agents
by strains of bacteria which cause illness in humans has become a major problem
in the recent past.
Manufacturing. We have not yet identified the production method for
mutacin 1140.
Method of Administration. We expect that, if we are successful in
identifying a production method for mutacin 1140 and obtaining the necessary
regulatory approvals, any products based on our mutacin 1140 technology will be
antibiotic drugs, available only by prescription. We do not yet know the method
by which products based on mutacin 1140 will be administered to patients. They
may be administered orally, topically or by injection.
Competition. We believe that the current direct competitors with our
mutacin 1140 technology are antibiotic drugs such as vancomycin and others.
There are strains of bacteria which have developed resistance even to
vancomycin. We believe that there is ample room in the marketplace for new
antibiotic drugs.
We are aware of a mutacin peptide similar to mutacin 1140 patented by the
University of Laval. Successful development of that technology would constitute
major competition for mutacin 1140.
Many potential competitors of ours are taking approaches quite different
from ours to the development of antibiotic drugs. These include traditional
natural products screening, genomics to identify new antibiotic targets and
combinatorial chemistry to generate new chemical structures. Competition in the
pharmaceutical industry is based on drug safety, efficacy, ease of use, patient
compliance, price, marketing and distribution. The commercial success of our
mutacin 1140 technology will depend on our ability and the ability of our
sublicensees to compete effectively in all these areas. There can be no
assurance our competitors will not succeed in developing products which are more
effective than mutacin 1140, or which would render mutacin 1140 obsolete and non
competitive.
If we are able to find a suitable method for producing mutacin 1140 and to
obtain the necessary regulatory approvals, any products based on our mutacin
1140 technology will compete against a large number of prescription antibiotics
currently on the market, and against new antibiotic products which will enter
the market over the next several years. Producers of antibiotic products include
many large, international pharmaceutical companies, all of which have much
greater financial and technical resources than us. It is our intention to
compete in the market for antibiotic products by obtaining a strategic partner
with an established sales force calling on doctors and hospitals. There can be
no assurance we will be able to obtain any such partner. If we are not, we will
be obliged to develop our own channels of distribution for products based on
mutacin 1140. There can be no assurance we will be able to do so.
License. We hold our patented mutacin 1140 technology under license from
the University of Florida Research Foundation, Inc. dated June 22, 2000. It was
amended on September 15, 2000, July 10, 2002, September 25, 2002 and March 17,
2003. It provides us with an exclusive world wide license to make, use and sell
products and processes covered by patents no. 5,932,469 and 6,391,285. These
patents together cover mutacin 1140, a pharmaceutical preparation containing
mutacin 1140, and the method of controlling growth of bacteria by use of mutacin
1140. Our license is for a period of the patent, subject to the performance of
terms and conditions contained therein. The University of Florida Research
Foundation, Inc. has reserved for itself and the University of Florida the right
to use and sell such products and services for research purposes only. Our
license also provides the University of Florida Research Foundation, Inc. with a
license, for research purposes only, to any improvements we make to the products
and processes covered by the patent. Patent No. 5,932,469 is dated August 3,
1999 and expires August 2, 2016, and Patent No. 6,391,285 is dated May 21, 2002
and expires May 20, 2019. Under the terms of the license, we are obligated to
pay 5% of the selling price of our products to the University of Florida
Research Foundation, Inc. If we sublicense the license, we are obligated to pay
20% of the amounts we receive from the sublicensee to the University of Florida
Research Foundation, Inc. In calendar year 2005 and each year thereafter we are
obligated to make a minimum royalty payment of $50,000. We spent at least an
aggregate of $600,000 in 2003 and are obligated to spend or cause to be spent an
aggregate of $1,000,000 in each calendar year following 2003 on the research,
development and regulatory prosecution of our replacement therapy and mutacin
1140 technologies together, until a product which is covered wholly or partially
by the claims of the patent, or is manufactured using a process which is covered
wholly or partially by the claims of the patent, is sold commercially.
10
If we fail to make these minimum expenditures, the University of Florida
Research Foundation, Inc. may terminate our license.
We have agreed to indemnify and hold the University of Florida Research
Foundation, Inc. harmless from any damages caused as a result of the production,
manufacture, sale, use, lease, consumption or advertisement of the product.
Further, we are required to maintain liability insurance coverage appropriate to
the risk involved in marketing the products. We have obtained liability
insurance in the amount of $1,000,000. This policy expires on June 24, 2004.
Intellectual Property Matters. We do not hold any patents on our mutacin
1140 technology. Our rights to this technology flow from our license with the
University of Florida Research Foundation, Inc.
We are aware that the University of Laval has obtained a patent in respect
of a mutacin antibiotic similar to mutacin 1140. It is our view that this patent
and our licensed patent do not infringe on each other. The University of Florida
Research Foundation, Inc. obtained its patent in respect of mutacin 1140 before
the University of Laval obtained its patent. Nevertheless, it is possible our
licensed patent may infringe on the University of Laval's patent. If so, we may
have to incur substantial costs related to sublicensing the University of
Laval's patent, or if we are unable to negotiate a sublicense, we may be exposed
to litigation from the University of Laval.
Regulatory Status. We have not yet submitted an investigational new drug
application to the FDA for our mutacin 1140 technology, because we have not yet
found a method to produce it in quantities necessary to undertake such studies.
We have hired two senior scientists dedicated to creating a satisfactory
production method. We hope to complete development of such a method within 6 to
9 months.
Our patient estimate for each phase of the clinical trial process for our
mutacin 1140 technology is:
PHASE I PHASE II/III
24-30 500 - 1,000
11
PROBIOTIC TECHNOLOGY
Background. Probiotics employ naturally occurring bacteria to confer a
health benefit when administered in adequate amounts. Probiotics are widely
accepted in Japan and Europe and acceptance in the United States is growing. The
uses of yogurt containing live Lactobacillus cultures to improve digestion,
immune system support or vaginal and urinary tract health are examples of common
probiotic applications. Dr. Hillman has capitalized on his extensive research to
create a probiotic product that is intended to maintain dental and periodontal
health.
Market Opportunity. Probiotics have been targeted at improving the
digestive system for many years, and they have broad acceptance in Japan and
Europe. The world market has been estimated at greater than $3 billion in annual
sales. If successfully developed, our probiotic treatment will be one of the
first probiotic products marketed for the maintenance of oral health.
Technical Background. We have identified three natural strains of bacteria
that can be employed as a probiotic product. Our laboratory and animal studies
have demonstrated the ability of these organisms to maintain a healthy oral
environment by creating a healthful balance of total bacteria, including a
reduction in the numbers of bacteria that are the causative agents of
periodontal disease and tooth decay.
Laboratory Testing. Research by Dr. Hillman and others has shown that
certain types of natural bacteria normally present in dental plaque can prevent
the growth of bacteria that are widely believed to be responsible for
periodontal (gum) disease. The beneficial bacteria are called Streptococcus
oralis and Streptococcus uberis. These bacteria have been shown to inhibit the
growth of disease-causing bacteria both in the laboratory and in animal models
of infection.1,2 Analysis of data from a number of laboratories indicated that
the presence of S. oralis and S. uberis provided a good indication of the health
of the gums.3 When these bacteria are absent from sites in the gums, the sites
are much more prone to disease. In order to maintain a healthy balance of
bacteria in the gums, Oragenics will provide a probiotic product that contains a
mixture of S. oralis and S. uberis.
Most human tooth decay has been shown to be caused by Streptococcus
mutans, which lives on nearly everyone's tooth surfaces and converts sugar in
their diet to lactic acid. The lactic acid erodes the mineral in enamel and
dentine, weakening the tooth and ultimately resulting in decay. Research by Dr.
Hillman has led to the discovery of a particular strain of Streptococcus rattus
that is naturally deficient in its ability to produce lactic acid. Therefore,
this strain of S. rattus was shown to be unable to cause tooth decay.4 Because
S. rattus is very closely related to S. mutans, we believe that daily treatment
with this beneficial strain could significantly reduce the numbers of tooth
decay-causing S. mutans by competing for nutrients and attachment sites on the
tooth surface. This belief has been tested in laboratory animals and was
confirmed. Therefore, the Oragenics probiotic will contain a mixture of three
natural bacteria that includes lactic acid-deficient S. rattus strain for the
maintenance of dental health, in addition to the S. oralis and S. uberis strains
for the maintenance of periodontal health.
Oragenics is currently performing acute and 3 month chronic toxicity
testing in laboratory rats. Further work will involve studies to determine an
appropriate and stable delivery system, and to determine the optimum dosage
levels in human clinical trials.
1 Socransky et al., Associations Between Microbial Species in Subgingival
Plaque Samples. Oral Microbiology and Immunology (1987) Vol.3:1-7.
2 Hillman et al., Interaction Between Wild-type, Mutant and Revertant
Forms of the Bacterium Streptococcus sanguis and the Bacterium
Actinobacillus actinomycetemcomitans In Vitro and in the Gnotobiotic
Rat. Archives of Oral Biology (1988) Vol.33:395-401.
3 Socransky et al., Associations Between Microbial Species in Subgingival
Plaque Samples. Oral Microbiology and Immunology (1987) Vol.3:1-7.
4 Johnson et al., Cariogenic Potential In Vitro in Man and In Vivo in the
Rat of Lactate Dehydrogenase Mutants of Streptococcus mutans. Archives
of Oral Biology Vol.25:707-713.
12
Manufacturing. The manufacturing methods for producing our probiotic
strains will be standard fermentation methods. These involve culturing bacteria
in large vessels and harvesting them when mature by centrifuge or filtration.
These methods are commonplace and readily available within the pharmaceutical
industry.
Method of Administration. We expect that the product will be
self-administered by consumers as a mouth rinse.
Competition. Many companies sell probiotics that are principally designed
for digestive health, vaginal health and immune system support. Our product will
not compete directly with these companies. Recently researchers at the
University of Hiroshima have published studies that indicate the Lactobacillus
reuteri aids in the prevention of tooth decay. Lactobacillus reuteri is widely
used as a probiotic for other indications and may be used in the future for
dental health. We are not aware of any product on the market today that is
targeted to maintain periodontal health.
Intellectual Property Matters. We filed a patent application for this
technology in August of 2003. The Company owns the patent rights to this
technology.
Regulatory Status. Probiotic products that claim to confer a health
benefit are generally able to enter the market without the need for extensive
regulatory filings and testing. This avenue is available for products that do
not make any claim that they treat, prevent or cure a disease, which are
considered to be drug claims. We intend to market our probiotic product without
any drug claims.
OTHER LICENSED TECHNOLOGY
In March 2004, we licensed from IviGene Corporation applications of a
novel technology that enables the simple, fast identification of novel and
potentially important gene targets associated with the natural onset and
progression of cancers and other diseases in humans and other living organisms,
including plants. This licensed technology will offer us the potential to
generate and develop a number of product candidates for future out-licensing to
corporate partners, particularly in the area of cancer.
This technology platform was developed by our founder, chairman and chief
scientific officer, Jeffrey D. Hillman, and University of Florida scientists. It
is called in vivo induced antigen technology (IVIAT). IVIAT can quickly and
easily identify in vivo induced genes in human infections without the use of
animal models, facilitating the discovery of new targets for the development of
vaccines, antimicrobials and diagnostics. Dr. Hillman and his collaborators have
further developed methods based on this approach to create Change Mediated
Antigen Technology (CMAT). CMAT can be used to identify gene targets associated
with the onset and progression of cancerous processes and autoimmune diseases.
It can also be used to identify novel genes in plant diseases, including genes
expressed by the pathogen when it causes the disease and genes expressed by the
plant in response to the disease.
Our license provides us with exclusive worldwide rights to this broad
platform technology in the areas of cancer and tuberculosis, as well as
agricultural and other non-human uses. In return, we will pay royalties on
revenues we are able to generate from any products developed using the
technology, including royalties on sublicense fees, milestone payments and
future product sales. To support the research for this technology, we have
received a $100,000 Phase I SBIR Grant from the National Institute of Allergy
and Infections Diseases (NIAID) of the National Institutes of Health (NIH). This
grant will support initial research to help us identify genes of Mycobacterium
tuberculosis that are specifically induced during human infections with that
pathogen.
Directors and officers of Oragenics have a significant ownership interest
in IviGene Corporation. Under the terms of our license with IviGene we are not
obligated to make any payments to IviGene until we have achieved certain
milestone or royalty payments.
This licensed technology is in its early stages and will require further
development which will require additional capital.
13
FEDERAL FOOD AND DRUG ADMINISTRATION (FDA) REGULATION
The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements upon the
clinical development, manufacture and marketing of drugs. These agencies and
other federal, state and local entities regulate research and development
activities and the testing, manufacture, quality control, safety, effectiveness,
labeling, storage, record-keeping, approval, advertising and protection of most
products we may develop.
GENERAL
The steps required before a new drug may be produced and marketed in the
United States are:
1. Preclinical laboratory and animal tests
2. Investigational new drug application
3. Clinical trials (Phases I, II and III)
4. New drug application (review and approval)
5. Post-marketing surveys
The testing and approval procedures require substantial time, effort and
financial resources and we cannot assure you that any approval will be timely
granted, or at all.
PRECLINICAL TRIALS AND INVESTIGATIONAL NEW DRUG APPLICATION
Preclinical tests are conducted in the laboratory, and usually involve
animals. They are done to evaluate the safety and efficacy of the potential
product. The results of the preclinical tests are submitted as part of the
investigational new drug application and are fully reviewed by the FDA prior to
granting the applicant permission to commence clinical trials in humans.
Submission of an investigational new drug application may not result in FDA
approval to commence clinical trials.
CLINICAL TRIALS
Clinical trials are conducted in three phases, normally involving
progressively larger numbers of patients.
PHASE I
Phase I clinical trials consist of administering the drug and testing for
safety and tolerated dosages as well as preliminary evidence of efficacy in
humans. They are concerned primarily with learning more about the safety of the
drug, though they may also provide some information about effectiveness. Phase I
testing is normally performed on healthy volunteers. The test subjects are paid
to submit to a variety of tests to learn what happens to a drug in the human
body; how it is absorbed, metabolized and excreted, what effect it has on
various organs and tissues; and what side effects occur as the dosages are
increased. The principal objective is to determine the drug's toxicity.
PHASE II
Assuming the results of Phase I testing present no toxicity or
unacceptable safety problems, Phase II trials may begin. In many cases Phase II
trials may commence before all the Phase I trials are completely evaluated if
the disease is life threatening and preliminary toxicity data in Phase I shows
no toxic side effects. In life threatening disease, Phase I and Phase II trials
are sometimes combined to show initial toxicity and efficacy in a shorter period
of time. Phase II trials involve a study to evaluate the effectiveness of the
drug for a particular indication and to determine optimal dosages and dose
interval and to identify possible adverse side effects and risks in a larger
patient group. The primary objective of this stage of clinical testing is to
show whether the drug is effective in treating the disease or condition for
which it is intended. Phase II studies may take several months or longer and
involve a few hundred patients in randomized controlled trials that also attempt
to disclose short-term side effects and risks in people whose health is
impaired. A number of patients with the disease or illness will receive the
treatment while a control group will receive a placebo. At the conclusion of
Phase II trials, we and the FDA will have a clear understanding of the
short-term safety and effectiveness of our technologies and their optimal dosage
levels.
14
PHASE III
Phase III clinical trials will generally begin after the results of Phase
II are evaluated. If a product is found to be effective in Phase II, it is then
evaluated in Phase III clinical trials. The objective of Phase III is to develop
information that will allow the drug to be marketed and used safely. Phase III
trials consist of expanded multi-location testing for efficacy and safety to
evaluate the overall benefit or risk index of the investigational drug in
relation to the disease treated. Phase III trials will involve thousands of
people with the objective of expanding on the clinical evidence.
Some objectives of Phase III trials are to discover optimum dose rates and
schedules, less common or even rare side effects, adverse reactions, and to
generate information that will be incorporated into the drug's professional
labeling and the FDA-approved guidelines to physicians and others about how to
properly use the drug.
PHARMACEUTICAL DEVELOPMENT
The method of formulation and manufacture may affect the efficacy and
safety of a drug. Therefore, information on manufacturing methods and standards
and the stability of the drug substance and dosage form must be presented to the
FDA and other regulatory authorities. This is to ensure that a product that may
eventually be sold to the public has the same composition as that determined to
be effective and safe in the clinical studies. Production methods and quality
control procedures must be in place to ensure a relatively pure compound,
essentially free of contamination and uniform with respect to all quality
aspects.
NEW DRUG APPLICATION
The fourth step that is necessary prior to marketing a new drug is the new
drug application submission and approval. In this step, all the information
generated by the preclinical and human clinical trials, as well as manufacturing
information for the drug, will be submitted to the FDA and, if successful, the
drug will be approved for marketing.
POST MARKETING SURVEYS
The final step is the random surveillance or surveys of patients being
treated with the drug to determine its long-term effects. This has no effect on
the marketing of the drug unless highly toxic conditions are found.
The required testing, data collection, analysis and compilation of an
investigational new drug application and a new drug application are labor
intensive and costly and may take a great deal of time. Tests may have to be
redone or new tests performed in order to comply with FDA requirements.
Therefore, we cannot estimate with any certainty the length or the costs of the
approval process. We can offer no assurance that we will ever receive FDA
approval of products derived from our licensed, patented technologies.
OUR REGULATORY CONSULTANTS
We have engaged Health Decisions to provide us with consulting services
relating to our regulatory affairs, and strategic and scientific advice related
to our projects, under an agreement dated October 24, 2003. We have agreed to
pay Health Decisions fees ranging from $550 to $2,200 per day. We will also pay
Health Decisions out-of-pocket and other expenses incurred as a result of
performing their services. Either party may terminate the agreement without
cause at any time.
15
Marketing. We presently intend to seek to sublicense our replacement
therapy and mutacin 1140 technologies to pharmaceutical companies for
manufacturing and marketing. Assuming the new drug applications are successful,
the sublicensees would be responsible for marketing products derived from our
licensed, patented technologies. We intend to select sublicensees on the basis
of their experience and financial success. We can offer you no assurances that
we will obtain FDA approval for our technologies or that we will be successful
in entering into sublicenses with established multinational companies.
COMPETITION
Industry. The pharmaceutical and biotechnology industries are
characterized by intense competition, rapid product development and
technological change. Competition is intense among manufacturers of dental
therapeutics and prescription pharmaceuticals. Most of our potential competitors
are large, well established pharmaceutical, chemical or healthcare companies
with considerably greater financial, marketing, sales and technological
resources than are available to us. Academic institutions, government agencies
and other public and private research organizations may also conduct research,
seek patent protection and establish collaborative arrangements for discovery,
research and clinical development of technologies and products similar to ours.
Many of our potential competitors have research and development capabilities
that may allow them to develop new or improved products that may compete with
products based on our technologies. Products developed from our technologies
could be rendered obsolete or made uneconomical by the development of new
products to treat the conditions to be treated by products developed from our
technologies, technological advances affecting the cost of production, or
marketing or pricing actions by our potential competitors. This could materially
affect our business, financial condition and results of operations. We cannot
assure you that we will be able to compete successfully.
Personnel. Competition among biotechnology and biopharmaceutical companies
for qualified employees is intense, and there can be no assurance we will be
able to attract and retain qualified individuals. If we fail to do so, this
would have a material, adverse effect on the results of our operations and the
performance of your investment.
We do not maintain any life insurance on the lives of any of our officers
and directors. We are highly dependent on the services of our directors and
officers, particularly on those of Jeffrey Hillman and Mento Soponis. If one or
all of our officers or directors die or otherwise become incapacitated, our
operations could be interrupted or terminated.
RESEARCH AND DEVELOPMENT COSTS
In our last two fiscal years, we have spent $1,239,362 on research and
development of our technologies.
COSTS OF ENFORCING OUR LICENSES
We have licenses to sell products made using the replacement therapy and
mutacin 1140 technologies. The licenses were granted to us by the University of
Florida Research Foundation, Inc., which owns the patents to our technologies.
There is no assurance, however, that third parties will not infringe on our
licenses or their patents. In order to protect our license rights and their
patents, we or the University of Florida Research Foundation, Inc. may have to
file lawsuits and obtain injunctions. If we do that, we will have to spend large
sums of money for attorney fees in order to obtain the injunctions. Even if we
do obtain the injunctions, there is no assurance that those infringing on our
licenses or the University of Florida Research Foundation's patents will comply
with the injunctions. Further, we may not have adequate funds available to
prosecute actions to protect or to defend the licenses and patents, in which
case those infringing on the licenses and patents could continue to do so in the
future.
OUR EMPLOYEES
We are an early-stage biotechnology research and development company and
currently have eleven full time employees other than our three officers and
directors.
16
AVAILABLE INFORMATION
Our website is www.oragenics.com. On our website we make available at no
cost our annual reports on Form 10-KSB, quarterly reports on Form 10-QSB,
current reports on Form 8-K and amendments to those reports filed or furnished
as soon as reasonably practicable after we electronically file such material
with, or furnish them to, the United States Securities and Exchange Commission
("SEC").
ITEM 2. DESCRIPTION OF PROPERTY.
Our administrative office and laboratory facilities are located at 12085
Research Drive, Alachua, Florida 32615. This is also our mailing address. Our
telephone number is (386) 418-4018. We lease this property from the University
of Florida Research Foundation, Inc. pursuant to an operating lease from March
15, 2003 to March 14, 2004 that was amended on January 26, 2004 allowing us to
continue occupancy on a month-to-month basis. The annual rental is $43,352.
In January 2004, we entered into an agreement with a real estate developer
to have a facility built that we will lease from the developer. The agreement
requires us to pay a deposit of $6,400 and provides for monthly lease payments
of $6,400, exclusive of utilities, insurance and real estate taxes. We also
anticipate paying approximately $250,000 for equipment to outfit the facility.
We anticipate moving to the new facility in July 2004 or shortly thereafter.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, we are not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None during the fourth quarter of the fiscal year covered by this report.
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Oragenics, Inc. common stock is traded on the TSX Venture Exchange Tier 2
under the symbol ORA.U. The following sets forth the high and low closing bid
prices for the common stock on the TSX Venture Exchange for the periods
indicated. Such prices represent prices between dealers without adjustment for
retail mark ups, mark downs, or commissions and may not necessarily represent
actual transactions.
2003
High Low
COMMON STOCK
Second quarter (commencing June 24, 2003) $ 2.30 $ 1.80
Third quarter $ 4.45 $ 2.62
Fourth quarter $ 4.40 $ 3.50
On March 12, 2004, the closing bid prices of the common stock, as reported
by TSX Venture Exchange, was $3.45. As of December 31, 2003, there were
approximately 16 record owners of our common stock. The number of record holders
does not reflect the number of beneficial owners of the common stock for whom
shares are held by banks, brokerage firms and others. Based on information
requests received from representatives of such beneficial owners, management
believes that as of March 12, 2004, there were approximately 548 beneficial
holders of the common stock.
On January 16, 2004, the National Association of Securities Dealers,
Inc. ("NASD") cleared our common stock for eligibility for quotation on the OTC
Bulletin Board. Our symbol on the OTC Bulletin Board is "OGEN."
DIVIDENDS
To date, we have neither declared nor paid any dividends on our common
stock nor do we anticipate that such dividends will be paid in the foreseeable
future. Rather, we intend to retain any earnings to finance the growth and
development of our business. Any payment of cash dividends on our common stock
in the future will be dependent, among other things, upon our earnings,
financial condition, capital requirements and other factors which the board of
directors deems relevant. In addition, restrictive covenants contained in any
financing agreements entered into in the future may preclude payment of
dividends.
RECENT SALES OF UNREGISTERED SECURITIES
There were no sales of unregistered securities during 2003.
USE OF PROCEEDS
On June 24, 2003, we completed an initial public offering. The managing
underwriter for our initial public offering was Haywood Securities, Inc. Under
the registration statement, we registered 2,400,000 units at a price of $1.25
per unit. Each unit consisted of one share of common stock, one half of one
non-transferable Series A Common Stock Purchase Warrant and one half of one
non-transferable Series B Common Stock Purchase Warrant. The shares of common
stock sold in the offering and eligible for issuance upon exercise of the
warrants were registered under the Securities Act of 1933 on a registration
statement (File No. 333-100568) that was declared effective by the Securities
and Exchange Commission on June 11, 2003. One whole Series A warrant may be
exercised on or before December 24, 2003 to acquire one share of common stock at
a price of $2.00 per share. One whole Series B warrant may be exercised on or
before March 24, 2004 to acquire one share of common stock at a price of $3.00
per share. All 2,400,000 units were sold in the offering that provided gross
proceeds of $3,000,000 and net proceeds to us of approximately $2,300,000 after
deducting $717,388 in commissions paid to the underwriter and other expenses
incurred in connection with the offering. In addition, the underwriter received
warrants to purchase 500,000 shares at $1.25 per share on or before June 24,
2005. Through December 31, 2003, 1,200,000 of the Series A Warrants, 9,750 of
the Series B Warrants and 160,750 of the underwriter's warrants were exercised
for total cash proceeds of $2,630,188 and 1,370,500 shares of the Company's
common stock were issued.
18
Through December 31, 2003 we have applied a total of $1,344,211 in net
proceeds from the offering as follows:
Reduction of notes payable and accrued interest thereon to directors and officers:
Brian McAlister (Cornet Capital Corp.) $ 179,757
Robert Zahradknik 72,418
Jeffrey Hillman 13,036
Deferred compensation payable to officers 137,500
Patent expenses paid to University of Florida 100,000
Regulatory consulting fees 112,000
Mutacin 1140 production research 143,000
Preclinical research 262,500
General and administration costs 299,500
Purchase of computer and laboratory equipment 24,500
------------
$ 1,344,211
Other than normal and recurring compensation and payments on notes
payable, there were no other payments, directly or indirectly, to any of our
officers or directors or any of their associates, or to any persons owning ten
percent or more of our outstanding common stock from the proceeds of this
offering. Unexpended proceeds are held in one financial institution and invested
overnight in obligations of the U. S. Government or its agencies. Actual
commissions and other expenses associated with the offering were $717,388, as
compared to estimated commissions and expenses described in the prospectus of
$575,000. The difference of $142,388 was essentially caused by additional fees
incurred by underwriter's legal counsel of $54,284, by our legal counsel of
$60,812 and by our auditors of $37,000 due to the length of time involved in
finalizing our initial public offering.
19
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto included elsewhere in this Form
10-KSB. This discussion contains certain forward-looking statements that involve
risks and uncertainties. The Company's actual results and the timing of certain
events could differ materially from those discussed in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth herein and elsewhere in this Form 10-KSB.
OVERVIEW
We, Oragenics, Inc., are a biotechnology company aimed at adding value to
novel technologies and products sourced from innovative research at the
University of Florida and other academic centers. Our aim is to in-license and
develop products through human proof-of-concept (Phase I or II) prior to
partnering with major pharmaceutical, biotechnology or healthcare product firms
for advanced clinical development and commercialization. We have generated no
revenues from operations during the last two years. All of our revenues have
been from a sponsored research agreement which has expired; none have been from
sales.
We are currently developing the following products, each of which
addresses potential market opportunities:
- - REPLACEMENT THERAPY is a single, painless topical treatment that has
the potential to offer life-long protection from most tooth decay. We
expect to initiate Phase I safety studies with this product during
2004.
- - MUTACIN 1140 is a novel antibiotic with activity against essentially
all Gram-positive bacteria including vancomycin-resistant
Staphylococcus aureus. Researchers have not succeeded to-date in
demonstrating bacterial resistance to this antibiotic. We are currently
in early preclinical stages of development for Mutacin 1140.
- - "PROBIOTIC" TECHNOLOGY employs naturally occurring beneficial bacteria
to promote oral and periodontal health. Probiotics are widely employed
in Japan and Europe and acceptance in the United States is growing.
Such products may be marketed as "health supplements" without the need
for regulatory filings, offering the opportunity for near-term
commercialization.
- - "OTHER" TECHNOLOGIES include other technologies that we may develop
from our research and development activities or that we may license,
including our recently licensed technology called in vivo induced
antigen technology that enables the simple, fast identification of
novel and potentially important gene targets associated with the
natural onset and progression of infections, cancers and other diseases
in humans and other living organisms, including plants.
A more detailed discussion of each technology follows:
REPLACEMENT THERAPY
Streptococcus mutans (S. mutans) is a strain of bacteria residing on
everyone's teeth. The activity of this bacterium in converting sugar to lactic
acid is the principal cause of tooth decay. Our Replacement Therapy employs a
patented, genetically modified strain of S. mutans that does not produce this
decay-producing acid. When applied to a person's teeth via a painless mouthwash,
this organism will displace the resident acid-producing S. mutans providing
potentially life-long protection against most dental decay. Replacement therapy
is the result of 25 years of research by our founder and chief scientific
officer, Jeffrey Hillman, DMD, PhD, a world-renowned molecular geneticist and
expert on oral microbiology. Our plans are to initiate Phase I trials of this
treatment during 2004.
MUTACIN 1140
Research has shown that the effective oral colonization by our Replacement
Therapy bacterial strain is due to its production of a highly potent
bactericidal substance with a broad antimicrobial spectrum of activity. Research
has characterized this substance, called mutacin 1140, as a novel lantibiotic -
a peptide containing the unusual amino acid lanthionine. Scientists have
identified approximately 20 lantibiotics to date, including nisin, a substance
used as a food preservative that has been given status as "GRAS" or "generally
recognized as safe" by regulatory authorities.
20
In vitro studies show mutacin 1140 to have highly effective antibiotic
activity against all Gram-positive bacteria tested to date including
vancomycin-resistant Staphylococcus Aureus and Enterococcus faecalis, both of
which are rapidly growing healthcare problems. Moreover, to date, bacteria
exposed to mutacin 1140 have not acquired resistance to mutacin 1140's
bactericidal effects. We are currently conducting preclinical development and
developing a method for the commercial production of mutacin 1140. The company
expects to complete this effort and file an Investigational New Drug application
to begin clinical testing of mutacin 1140 in 2005.
"PROBIOTIC" TECHNOLOGY
Probiotics are live microorganisms that confer a health benefit to their host
when administered in adequate amounts; the use of yogurt containing live
Lactobacillus cultures to improve vaginal and urinary tract health is an example
of a common probiotic application. Our research suggests that probiotics can
reduce the levels of "bad" bacteria that contribute to poor oral health. We have
identified three natural strains of bacteria and have demonstrated inlaboratory
tests and animal studies the ability of these organisms to provide significant
protection against the causative organisms of periodontal disease and tooth
decay. We plan to conduct human studies of our probiotic treatment during 2004.
Because probiotic treatments are not generally subject to regulatory oversight,
we believe we may achieve commercialization of this product in certain markets
by early 2005. Probiotics have been targeted at improving the digestive system
for many years, and they have broad market acceptance for this use in Japan and
growing market appeal in Europe and the United States. If successfully
developed, our probiotic treatment will be one of the first probiotic products
marketed for the maintenance of oral health.
OTHER TECHNOLOGY
From time to time we may develop or license additional technologies that
we believe would have market potential. For example we recently licensed
technology that will offer us the potential to generate and develop a number of
product candidates for future out-licensing to corporate partners, particularly
in the area of cancer. This technology platform was developed by our founder,
chairman and chief scientific officer, Jeffrey D. Hillman, and University of
Florida scientists. It is called in vivo induced antigen technology (IVIAT).
IVIAT can quickly and easily identify in vivo induced genes in human infections
without the use of animal models, facilitating the discovery of new targets for
the development of vaccines, antimicrobials and diagnostics. Dr. Hillman and his
collaborators have further developed methods based on this approach to create
Change Mediated Antigen Technology (CMAT). CMAT can be used to identify gene
targets associated with the onset and progression of cancerous processes and
autoimmune diseases. It can also be used to identify novel genes in plant
diseases, including genes expressed by the pathogen when it causes the disease
and genes expressed by the plant in response to the disease.
BUSINESS OBJECTIVES AND MILESTONES
The specific goal of our business is to successfully develop, clinically
test and obtain FDA approval for sales of products based on our licensed,
patented technologies. Our present strategy involves undertaking the animal
studies necessary for approval of an investigational new drug application for
each technology. If successful, we will then undertake and complete Phase I
human clinical trials. We intend at that point to consider a sublicense of each
of our technologies to one or more pharmaceutical companies, who will be
responsible for funding the completion of the Phase II and III clinical trials
for the technologies, the cost of the new drug application (see "Federal Food
and Drug Administration Regulations"), and for the manufacture and distribution
of products based on our technologies. In order to accomplish these objectives,
we must take the following actions:
REPLACEMENT THERAPY
1. Obtain FDA approval to begin human clinical studies.
2. Complete Phase I clinical trials.
21
MUTACIN 1140
1. Develop a suitable production method for mutacin 1140.
2. Complete preclinical studies, including animal toxicity and efficacy,
required for an investigational new drug application submission.
3. Submit an investigational new drug application to the FDA. .
PROBIOTIC TECHNOLOGY
1. Conduct pre-market safety studies in animals.
2. Develop appropriate manufacturing and packaging systems.
3. Complete one human study.
OTHER TECHNOLOGY
1. Complete research on TB targets as described in the NIAID Grant.
2. Begin program with CMAT on cancer targets.
These actions, both individually and in the aggregate, are expected to be
costly and will require additional capital to complete.
22
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
and Canada. The preparation of financial statements in accordance with
Accounting Principles Generally Accepted in the United States and Canada
requires us to make estimates and assumptions that affect reported amounts and
related disclosures. We consider an accounting estimate to be critical if it
requires assumptions to be made that were uncertain at the time the estimate was
made; and changes in the estimate or different estimates that could have been
made could have a material impact on our results of operations or financial
condition. Our financial statements do not include significant estimates that
have a material impact on our results of operations or financial condition.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46") that requires the consolidation of
variable interest entities, as defined. FIN 46, as revised, is applicable to
financial statements of companies that have interests in "special purpose
entities," as defined, during 2003. FIN 46 is applicable to financial statements
of companies that have interests in all other types of entities, in first
quarter 2004. However, disclosures are required currently if the Company expects
to consolidate any variable interest entities. The Company does not currently
believe that any material entities will be consolidated with it as a result of
FIN 46.
The Company adopted SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150") on
July 1, 2003. SFAS 150 establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity, such as redeemable
preferred stock and certain equity derivatives that frequently are used in
connection with share repurchase programs. The Company's adoption of SFAS 150
did not have a material impact on its results of operation or financial
position. On October 29, 2003, the FASB voted to defer for an indefinite period
the application of SFAS 150 to classification of non-controlling interests of
limited-life subsidiaries. The deferral did not have a material impact on the
Company's results of operations or financial position.
23
RESULTS OF OPERATIONS
Operating Results Summary
THREE MONTHS ENDED DECEMBER 31
2003 2002
------------------------------------------
Revenue $ - $ -
Operating expenses:
Research and development 333,150 97,971
General and administration 296,036 104,156
------------------------------------------
Total operating expenses 629,186 202,127
------------------------------------------
Loss from operations (629,186) (202,127)
Other income (expense):
Interest income 3,599 277
Interest expense (1,884) (2,095)
------------------------------------------
Total other income (expense), net 1,715 (1,818)
------------------------------------------
Loss before income taxes (627,471) (203,945)
Income tax benefit - 16,000
------------------------------------------
Net loss $ (627,471) $ (187,945)
==========================================
YEARS ENDED DECEMBER 31
2003 2002
------------------------------------------
Revenue $ - $ -
Operating expenses:
Research and development 929,355 310,007
General and administration 738,596 399,693
------------------------------------------
Total operating expenses 1,667,951 709,700
------------------------------------------
Loss from operations (1,667,951) (709,700)
Other income (expense):
Interest income 7,874 2,169
Interest expense (12,877) (8,072)
------------------------------------------
Total other expense, net (5,003) (5,903)
------------------------------------------
Loss before income taxes (1,672,954) (715,603)
Income tax benefit - 16,000
------------------------------------------
Net loss $ (1,672,954) $ (699,603)
==========================================
24
FOR THE QUARTERS ENDED DECEMBER 31, 2003 AND 2002
We had no revenues in the three months ended December 31, 2003 and 2002.
Our operating expenses increased 211% to $629,186 in the three months ended
December 31, 2003 from $202,127 in same period in 2002. Research and development
expenses increased 240% to $333,150 in the three months ended December 31, 2003
from $97,971 in the same period in 2002, reflecting the expensing of stock
option compensation, hiring of additional research staff, increased consumption
of laboratory supplies, an increase in occupied laboratory facilities and the
costs associated with regulatory filings. General and administration expenses
increased 184% to $296,036 in the three months ended December 31, 2003 from
$104,156 in same period in 2002. This increase reflects the expensing of stock
option compensation, increased costs relating to legal, accounting and financial
consulting, travel and liability insurance.
Interest income increased to $3,599 in the three months ended December 31,
2003 from $277 in the same period in 2002. This significant increase was a
result of higher cash balances in 2003 due to the sale of common stock. Interest
expense decreased 10% to $1,884 in the three months ended December 31, 2003 from
$2,095 during the same period in 2002, reflecting the pay-off of shareholder
notes in December 2003.
We incurred net losses of $627,471 and $187,945 during the three months
ended December 31, 2003 and 2002, respectively. The increase in our net loss was
principally caused by the expensing of stock option compensation, hiring of
additional personnel, increased consumption of supplies, increased fees paid to
outside professionals, additional facilities leased and the cost of insurance in
2003.
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
We had no revenues in the years ended December 31, 2003 and 2002. Our
operating expenses increased 135% to $1,667,951 in the year ended December 31,
2003 from $709,700 in 2002. Research and development expenses increased 200% to
$929,355 in 2003 from $310,007 in 2002, reflecting the expensing of stock option
compensation, the hiring of research staff, increased consumption of laboratory
supplies, increase in occupied laboratory facilities and the costs associated
with regulatory filings and patent protection. General and administration
expenses increased 85% to $738,596 in 2003 from $399,693 in 2002, reflecting the
expensing of stock option compensation, salary increases, increased costs
relating to legal, accounting and financial consulting, travel and liability
insurance.
Interest income increased 263% to $7,874 in 2003 from $2,169 in 2002,
which was a result of the higher average cash balances maintained in 2003 due to
the sales of common stock through the initial public offering in June 2003 and
the exercise of Series A common stock warrants in December 2003. Interest
expense increased 60% to $12,877 in 2003 from $8,072 in 2002 as a result of
short-term borrowings from a director and shareholder during the first and
second quarter of 2003.
We incurred net losses of $1,672,954 and $699,603 during the years ended
December 31, 2003 and 2002, respectively. The increase in our net loss was
principally caused by the expensing of stock option compensation, hiring of
additional personnel, increased consumption of supplies, increased fees paid to
outside professionals, additional facilities leased and the cost of insurance in
2003.
25
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 2003, we have financed our operations
primarily through the issuance of common stock for $6,138,188 of which
$4,912,799 was received in 2003 in connection with the initial public offering
("IPO") of our common stock and common stock warrant exercises associated with
the IPO offering.
On February 14, 2003, we obtained a loan of $100,000 from Cornet Capital
Corp., and issued an uncollateralized promissory note in the principal amount of
$100,000 that pays interest at 10% per annum to Cornet Capital Corp. Principal
and interest are payable on demand and in any event before February 14, 2004. On
April 29, 2003, we obtained a further loan of $75,000 from Cornet Capital Corp.,
and issued an uncollateralized promissory note in the amount of $75,000 that
pays interest at 10% per annum to Cornet Capital Corp. Principal and interest
are payable on April 29, 2004. These borrowings were not made under the loan
facility with Cornet Capital Corp. described under "Certain Relationships and
Related Transactions." No shares were issued to Cornet Capital Corp. in
connection with these borrowings. These loans were repaid during 2003 from the
proceeds of our IPO.
We lease our laboratory and office facilities, as well as certain
equipment, under a 12-month cancelable operating lease with annual renewal
options. In January 2004, we entered into an agreement with a real estate
developer to have a facility built that we will lease from the developer. The
agreement requires us to pay a deposit of $6,400 and provides for monthly lease
payments of $6,400, exclusive of utilities, insurance and real estate taxes. We
also anticipate paying approximately $250,000 for equipment to outfit the
facility. It is anticipated we will begin occupancy in June 2004, however, we
have arranged to remain in our current location until the new facility is
complete.
We had cash and cash equivalents of $3,583,757 at December 31, 2003 that
are held in one financial institution and invested overnight in US government
securities. We anticipate that our current funds will be adequate to satisfy our
operating expenses and capital requirements as planned into 2005.
We expect to incur significant research and development expenses including
continued increases in personnel and costs related to research, preclinical
testing and clinical trials. We will require substantial funds to conduct
research and development and preclinical and Phase I clinical testing of our
licensed, patented technologies and to develop sublicensing relationships for
the Phase II and III clinical testing and manufacture and marketing of any
products that are approved for commercial sale. Our future capital requirements
will depend on many factors, including continued scientific progress in our
research and development programs, the magnitude of these programs, the scope
and results of preclinical testing and clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims, competing
technological and market developments and our ability to establish development,
manufacturing and marketing arrangements. We intend to seek additional funding
through sublicensing arrangements or through public or private financings, but
there can be no assurance that additional financing will be available on
acceptable terms or at all.
RISK FACTORS AFFECTING OUR BUSINESS
Investors should carefully consider the following risk factors, in
addition to the other information concerning the factors affecting
forward-looking statements. Each of the risk factors could adversely affect our
business, operating results and financial condition as well as adversely affect
the value of an investment in us.
Certain oral statements made by management from time to time and certain
statements contained herein and in documents incorporated herein by reference
that are not historical facts are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and, because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. The terms "Oragenics," "company,"
"we," "our," and "us" refer to Oragenics, Inc. The words "expect," "believe,"
"goal," "plan," "intend," "anticipate," "estimate," "will" and similar
expressions and variations thereof if used, are intended to specifically
identify forward-looking statements. Forward-looking statements are statements
regarding the intent, belief or current expectations, estimates or projections
of Oragenics, our directors or our officers about Oragenics and the industry in
which we operate, and assumptions made by management, and include among other
26
items, (i) our strategies regarding growth, including our intention to develop
and market our products; (ii) our financing plans; (iii) trends affecting our
financial condition or results of operations; (iv) our ability to continue to
control costs and to meet our liquidity and other financing needs; (v) our
ability to respond to and meet regulatory demands. Although we believe our
expectations are based on reasonable assumptions, we can give no assurance that
the anticipated results will occur. We disclaim any intention or obligation to
update or revise forward-looking statements, whether as a result of new
information, future events or otherwise.
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those in the forward-looking statements as a result of various factors which
include, among others, (i) general economic conditions, particularly those
affecting our ability to raise additional capital; (ii) conditions in the
capital markets, including the interest rate environment and the availability of
capital, which could affect our internal growth and possibilities for licensing
and/or strategic alliances; (iii) changes in the competitive marketplace that
could affect our expected revenue and/or costs of product development; (iv) our
rights to the use of intellectual property and the potential for others to
challenge and otherwise adversely affect or impair such rights; and (v) other
factors including those identified in our filings from time to time with the SEC
and the following risk factors:
WE HAVE EXPERIENCED A HISTORY OF LOSSES AND EXPECT TO INCUR FUTURE LOSSES. WE
HAVE GENERATED EXTREMELY LIMITED REVENUE FROM OUR OPERATIONS, AND NO REVENUE
FROM SALES. THEREFORE, WE MUST CONTINUE TO RAISE MONEY FROM INVESTORS AND SEEK
PARTNERS WITH WHOM TO COLLABORATE OUR RESEARCH AND DEVELOPMENT EFFORTS SO AS TO
FUND OUR OPERATIONS. IF WE ARE UNABLE TO FUND OUR OPERATIONS, WE MAY CEASE DOING
BUSINESS.
We have recorded minimal revenue to date and we have incurred a cumulative
operating loss of approximately $2,387,000 through December 31, 2003. Our losses
have resulted principally from costs incurred in research and development
activities related to our efforts to develop our technologies and from the
associated administrative costs. We expect to incur significant operating losses
and negative cash flows over the next several years due to the costs of expanded
research and development efforts and preclinical and clinical trials and hiring
additional personnel. We will need to generate significant revenues in order to
achieve and maintain profitability. We may not be able to generate these
revenues or achieve profitability in the future. Even if we do achieve
profitability, we may not be able to sustain or increase profitability. We have
limited capital resources and it is likely that we will require additional
capital to meet our future capital requirements. There is no assurance that such
capital will be available to us or, if available, be on terms acceptable to us.
To the extent we are unable to raise additional capital and our operating losses
continue, we will need to take actions to reduce our costs of operations, which
may adversely impact future operations, employee morale, business relations and
other aspects of our business. An increase in capital resulting from a capital
raising transaction under adverse business circumstances could result in
substantial dilution to existing holders of our common stock and adversely
impact our stock price.
THE FDA HAS PUT OUR INVESTIGATIONAL NEW DRUG APPLICATION FOR OUR REPLACEMENT
THERAPY TECHNOLOGY ON CLINICAL HOLD. IF WE ARE UNABLE TO OBTAIN OR MAINTAIN
REGULATORY CLEARANCE OR APPROVAL FOR OUR TECHNOLOGIES, WE WILL BE UNABLE TO
GENERATE REVENUES AND MAY HAVE TO CEASE OPERATIONS.
Our technologies have not been cleared for marketing by the FDA or foreign
regulatory authorities and cannot be commercially distributed in the United
States or any international markets until such clearance is obtained. Before
regulatory approvals can be obtained, our technologies will be subject to
extensive preclinical and clinical testing. These processes are lengthy and
expensive. We cannot assure that such trials will demonstrate the safety or
effectiveness of our technologies. There is a possibility that our replacement
therapy and mutacin 1140 technologies may be found to be unsafe or ineffective
or otherwise fail to satisfy regulatory requirements. The FDA has put our
investigational new drug application for our replacement therapy technology on
clinical hold. This means that we may not begin human clinical trials under our
application until the FDA gives us permission to do so. We have amended our
first investigational new drug application three times to respond to the FDA's
concerns. We filed a new investigational new drug application in March of 2003.
This investigational new drug application has also been placed on hold until we
satisfy the FDA's safety concerns. If we are unable to resolve the FDA's
concerns, we will not be able to proceed further to obtain regulatory approval
for that technology. If we fail to obtain or maintain FDA clearance for one or
all of our technologies we may have to cease operations.
27
OUR PRODUCT CANDIDATES ARE IN THE PRELIMINARY DEVELOPMENT STAGE, AND MAY NOT BE
EFFECTIVE AT A LEVEL SUFFICIENT TO SUPPORT A PROFITABLE BUSINESS VENTURE. IF
THEY ARE NOT, WE WILL BE UNABLE TO CREATE MARKETABLE PRODUCTS, AND WE MAY HAVE
TO CEASE OPERATIONS.
Our three product candidates are in the preliminary development state.
Although we have current data which indicates the promise of the concept of our
replacement therapy and mutacin 1140 technologies, we can offer you no assurance
that the technologies will be effective at a level sufficient to support a
profitable business venture. If they are not, we will be unable to create
marketable products, we will not generate revenues from our operations, and we
will have to cease operations. The science on which our replacement therapy and
mutacin 1140 technologies are based may also fail due to flaws or inaccuracies
on which the data are based, or because the data is totally or partially
incorrect, or not predictive of future results. If our science proves to be
flawed, incorrect or otherwise fails, we will not be able to create a marketable
product or generate revenues and we will have to cease operations.
THE SUCCESS OF OUR RESEARCH AND DEVELOPMENT ACTIVITIES IS UNCERTAIN. IF THEY DO
NOT SUCCEED, WE WILL BE UNABLE TO GENERATE REVENUES FROM OUR OPERATIONS AND WE
WILL HAVE TO CEASE DOING BUSINESS.
We intend to continue with research and development of our technologies
for the purpose of obtaining regulatory approval to produce and market them.
Research and development activities, by their nature, preclude definitive
statements as to the time required and costs involved in reaching certain
objectives. Actual costs may exceed the amounts we have budgeted and actual time
may exceed our expectations. If research and development requires more funding
than we anticipate, then we may have to reduce technological development efforts
or seek additional financing. There can be no assurance that we will be able to
secure any necessary additional financing or that such financing would be
available on favorable terms. Additional financings could result in substantial
dilution to existing shareholders. We anticipate we will remain engaged in
research and development for a considerable period of time.
IT IS POSSIBLE THAT OUR REPLACEMENT THERAPY TECHNOLOGY WILL BE LESS EFFECTIVE IN
HUMANS THAN IT HAS BEEN SHOWN TO BE IN ANIMALS. IT IS POSSIBLE OUR MUTACIN 1140
TECHNOLOGY WILL BE SHOWN TO BE INEFFECTIVE OR HARMFUL IN HUMANS. IF EITHER OF
THESE TECHNOLOGIES ARE SHOWN TO BE INEFFECTIVE OR HARMFUL IN HUMANS, WE WILL BE
UNABLE TO GENERATE REVENUES FROM THEM, AND WE MAY HAVE TO CEASE OPERATIONS.
To date the testing of our replacement therapy technology has been
undertaken solely in animals. Those studies have proven our genetically altered
strain of S. mutans to be effective in preventing tooth decay. It is possible
that our strain of S. mutans will be shown to be less effective in preventing
tooth decay in humans in clinical trials. If our replacement therapy technology
is shown to be ineffective in preventing tooth decay in humans, we will be
unable to commercialize and generate revenues from this technology. To date the
testing of our antibiotic substance, mutacin 1140, has been undertaken solely in
the laboratory. We have not yet conducted animal or human studies of mutacin
1140. It is possible that when we conduct these studies, they will show that
mutacin 1140 is ineffective or harmful. If mutacin 1140 is shown to be
ineffective or harmful, we will be unable to commercialize it and generate
revenues from sales of mutacin 1140. If we are unable to generate revenues from
either technology, we may have to cease operations.
IT IS POSSIBLE WE WILL BE UNABLE TO FIND A METHOD TO PRODUCE MUTACIN 1140 IN
LARGE-SCALE COMMERCIAL QUANTITIES. IF WE CANNOT, WE WILL BE UNABLE TO UNDERTAKE
THE PRECLINICAL AND CLINICAL TRIALS THAT ARE REQUIRED IN ORDER TO OBTAIN FDA
PERMISSION TO SELL IT, AND WE WILL BE UNABLE TO GENERATE REVENUES FROM IT, AND
WE MAY HAVE TO CEASE OPERATIONS.
Our antibiotic technology, mutacin 1140, is a substance produced by our
genetically altered strain of S. mutans. To date, it has been produced only in
laboratory cultures. In order for us to conduct the preclinical and Phase I
clinical studies that we must complete in order to find a partner who will
sub-license this technology from us and finance the Phase II and III clinical
studies we must complete in order to obtain FDA approvals necessary to sell
products based on this technology, we must demonstrate a method of producing
commercial quantities of this substance economically. To date we have not found
such a method and it is possible we will be unable to find one. If we are not
able to find such a method, we will be unable to generate revenues from this
technology and we may have to cease operations.
28
BEGINNING IN 2004, WE MUST SPEND AT LEAST $1 MILLION ANNUALLY ON DEVELOPMENT OF
THE TECHNOLOGIES UNDER OUR LICENSE AGREEMENTS WITH THE UNIVERSITY OF FLORIDA
RESEARCH FOUNDATION, INC. WE MUST ALSO COMPLY WITH CERTAIN OTHER CONDITIONS OF
OUR LICENSES. IF WE DO NOT, OUR LICENSES TO OUR TECHNOLOGIES MAY BE TERMINATED,
AND WE MAY HAVE TO CEASE OPERATIONS.
We hold our replacement therapy and mutacin 1140 technologies under
licenses from the University of Florida Research Foundation, Inc. Under the
licenses, we must spend at least $1 million per year beginning in 2004 and
thereafter on development of those technologies before the first commercial sale
of products derived from those technologies. If we do not, our licenses could be
terminated. Until commercial sales of such products take place, we will not be
earning revenues from the sale of products and will, therefore, have to raise
the money we must spend on development of our technologies by other means, such
as the sale of our common stock. There is no assurance we will be able to raise
the financing necessary to meet our obligations under our licenses. If we
cannot, we may lose our licenses to our technologies and have to cease
operations.
The University of Florida Research Foundation, Inc. may terminate our
licenses in respect of our replacement therapy technology and our mutacin 1140
technology if we breach our obligations to timely pay monies to it, submit
development reports to it or commit any other breach of the covenants contained
in the license agreement. There is no assurance that we will be able to comply
with these conditions. If we cannot, and if our license is terminated, our
investment in development of our replacement therapy technology will become
valueless and we may have to cease operations.
IF CLINICAL TRIALS FOR OUR PRODUCTS ARE UNSUCCESSFUL OR DELAYED, WE WILL BE
UNABLE TO MEET OUR ANTICIPATED DEVELOPMENT AND COMMERCIALIZATION TIMELINES,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Before obtaining regulatory approvals for the commercial sale of any
products, we must demonstrate through preclinical testing and clinical trials
that our products are safe and effective for use in humans. Conducting clinical
trials is a lengthy, time-consuming and expensive process.
Completion of clinical trials may take several years or more. Our
commencement and rate of completion of clinical trials may be delayed by many
factors, including:
o lack of efficacy during the clinical trials;
o unforeseen safety issues;
o slower than expected patient recruitment; and o government or
regulatory delays.
The results from preclinical testing and early clinical trials are often
not predictive of results obtained in later clinical trials. A number of new
products have shown promising results in clinical trials, but subsequently
failed to establish sufficient safety and efficacy data to obtain necessary
regulatory approvals. Data obtained from preclinical and clinical activities are
susceptible to varying interpretations, which may delay, limit or prevent
regulatory approval. In addition, regulatory delays or rejections may be
encountered as a result of many factors, including perceived defects in the
design of the clinical trials and changes in regulatory policy during the period
of product development. Any delays in, or termination of, our clinical trials
will materially and adversely affect our development and commercialization
timelines, which would adversely affect our business and cause our stock price
to decline.
WE INTEND TO CONSIDER RELYING ON THIRD PARTIES TO PAY THE MAJORITY OF THE COSTS
OF REGULATORY APPROVALS NECESSARY TO MANUFACTURE AND SELL PRODUCTS USING OUR
TECHNOLOGIES. IF WE ARE UNABLE TO OBTAIN AGREEMENTS WITH THIRD PARTIES TO FUND
SUCH COSTS, WE WILL HAVE TO FUND THEM OURSELVES. WE MAY BE UNABLE TO DO SO, AND
IF WE ARE NOT, WE MAY HAVE TO CEASE OPERATIONS.
29
We intend to consider sublicensing our licensed, patented technologies to
pharmaceutical companies after completion of Phase I clinical studies. If we do
so, our sublicensees will pay the costs of Phase II and III clinical trials, and
manufacturing and marketing our technologies. If we are unable to sublicense our
technologies, we will have to pay for the costs of Phase II and III trials and
new drug applications to the FDA ourselves. We would also have to set up our own
manufacturing facilities and find our own distribution channels. This would
greatly increase our future capital requirements and we cannot be assured we
would be able to obtain the necessary financing. If we are not, we may have to
cease operations.
IF OUR EXPECTED COLLABORATIVE PARTNERSHIPS DO NOT MATERIALIZE OR FAIL TO PERFORM
AS EXPECTED, WE WILL BE UNABLE TO DEVELOP OUR PRODUCTS AS ANTICIPATED.
We expect to enter into collaborative arrangements with third parties to
develop certain products. We cannot assure you that we will be able to enter
into these collaborations or that, if entered, they will produce successful
products. If we fail to maintain our existing collaborative arrangements or fail
to enter into additional collaborative arrangements, the number of products from
which we could receive future revenues would decline.
Our dependence on collaborative arrangements with third parties subjects
us to a number of risks. These collaborative arrangements may not be on terms
favorable to us. Agreements with collaborative partners typically allow partners
significant discretion in electing whether or not to pursue any of the planned
activities. We cannot control the amount and timing of resources our
collaborative partners may devote to products based on the collaboration, and
our partners may choose to pursue alternative products. Our partners may not
perform their obligations as expected. Business combinations or significant
changes in a collaborative partner's business strategy may adversely affect a
partner's willingness or ability to complete its obligations under the
arrangement. Moreover, we could become involved in disputes with our partners,
which could lead to delays or termination of the collaborations and
time-consuming and expensive litigation or arbitration. Even if we fulfill our
obligations under a collaborative agreement, our partner can terminate the
agreement under certain circumstances. If any collaborative partner were to
terminate or breach our agreement with it, or otherwise fail to complete its
obligations in a timely manner, our chances of successfully commercializing
products would be materially and adversely affected.
IF OUR INTELLECTUAL PROPERTY RIGHTS DO NOT ADEQUATELY PROTECT OUR PRODUCTS OR
TECHNOLOGIES, OTHERS COULD COMPETE AGAINST US MORE DIRECTLY, WHICH WOULD HURT
OUR PROFITABILITY.
Our success depends in part on our ability to obtain patents or rights to
patents, protect trade secrets, operate without infringing upon the proprietary
rights of others, and prevent others from infringing on our patents, trademarks
and other intellectual property rights. We will be able to protect our
intellectual property from unauthorized use by third parties only to the extent
that it is covered by valid and enforceable patents, trademarks and licenses.
Patent protection generally involves complex legal and factual questions and,
therefore, enforceability of patent rights cannot be predicted with certainty.
Patents, if issued, may be challenged, invalidated or circumvented. Thus, any
patents that we own or license from others may not provide adequate protection
against competitors. In addition, any future patent applications may fail to
result in patents being issued. Also, those patents that are issued may not
provide us with adequate proprietary protection or competitive advantages
against competitors with similar technologies. Moreover, the laws of certain
foreign countries do not protect intellectual property rights to the same extent
as do the laws of the United States.
In addition to patents and trademarks, we rely on trade secrets and
proprietary know-how. We seek protection of these rights, in part, through
confidentiality and proprietary information agreements. These agreements may not
provide meaningful protection or adequate remedies for violation of our rights
in the event of unauthorized use or disclosure of confidential and proprietary
information. Failure to protect our proprietary rights could seriously impair
our competitive position.
IF THIRD PARTIES CLAIM WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY RIGHTS, WE
COULD SUFFER SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR BE PREVENTED FROM
MARKETING OUR PRODUCTS.
30
Our commercial success depends significantly on our ability to operate
without infringing the patents and other proprietary rights of others. However,
regardless of our intent, our technologies may infringe the patents or violate
other proprietary rights of third parties. In the event of such infringement or
violation, we may face litigation and may be prevented from pursuing product
development or commercialization. We may receive in the future, notice of claims
of infringement of other parties' proprietary rights. Infringement or other
claims could be asserted or prosecuted against us in the future and it is
possible that past or future assertions or prosecutions could harm our business.
We received notification from B.C. International Corporation on July 29, 2002
that a gene utilized in our licensed, patented strain of S. mutans infringes a
patent which it holds under a license. Their notification did not state that
they intended to pursue legal remedies. Management of our Company does not
believe the gene in question infringes that patent. We have sent them
correspondence setting out our position and we have not heard anything further
from them. If necessary, we are prepared to assert our rights vigorously with
respect to such matter. If litigation should ensue and we are unsuccessful in
that litigation, we could be enjoined for a period of time from marketing
products which infringe any valid patent rights held or licensed by B.C.
International Corporation and/or we could owe substantial damages. If we become
involved in any claims, litigation, interference or other administrative
proceedings, we may incur substantial expense and the efforts of our technical
and management personnel may be significantly diverted. Any future claims or
adverse determinations with respect to our intellectual property rights may
subject us to loss of our proprietary position or to significant liabilities,
may require us to seek licenses from third parties, cause delays in the
development and release of new products or services and/or may restrict or
prevent us from manufacturing and selling certain of our products. If we are
required to seek licenses from third parties, costs associated with these
arrangements may be substantial and may include ongoing royalties. Furthermore,
we may not be able to obtain the necessary licenses on satisfactory terms, if at
all.
WE ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION, WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS.
The production and marketing of our products and our ongoing research and
development, preclinical testing and clinical trial activities are subject to
extensive regulation and review by numerous governmental authorities. Most of
the devices we are developing must undergo rigorous preclinical and clinical
testing and an extensive regulatory approval process before they can be
marketed. This process makes it longer, harder and more costly to bring our
products to market, and we cannot guarantee that any of our products will be
approved. The pre-marketing approval process can be particularly expensive,
uncertain and lengthy, and a number of products for which FDA approval has been
sought by other companies have never been approved for marketing. In addition to
testing and approval procedures, extensive regulations also govern marketing,
manufacturing, distribution, labeling, and record-keeping procedures. If we do
not comply with applicable regulatory requirements, such violations could result
in warning letters, non-approval, suspensions of regulatory approvals, civil
penalties and criminal fines, product seizures and recalls, operating
restrictions, injunctions, and criminal prosecution.
Delays in or rejection of FDA or other government entity approval of our
new products may also adversely affect our business. Such delays or rejection
may be encountered due to, among other reasons, government or regulatory delays,
lack of efficacy during clinical trials, unforeseen safety issues, slower than
expected rate of patient recruitment for clinical trials, inability to follow
patients after treatment in clinical trials, inconsistencies between early
clinical trial results and results obtained in later clinical trials, varying
interpretations of data generated by clinical trials, or changes in regulatory
policy during the period of product development in the U.S. In the U.S. more
stringent FDA oversight in product clearance and enforcement activities could
result in our experiencing longer approval cycles, more uncertainty, greater
risk, and higher expenses. Even if regulatory approval of a product is granted,
this approval may entail limitations on uses for which the product may be
labeled and promoted. It is possible, for example, that we may not receive FDA
approval to market our current products for broader or different applications or
to market updated products that represent extensions of our basic technology. In
addition, we may not receive FDA export approval to export our products in the
future, and countries to which products are to be exported may not approve them
for import.
Any manufacturing facilities would also be subject to continual review and
inspection. The FDA has stated publicly that compliance with manufacturing
regulations will be scrutinized more strictly. A governmental authority may
challenge our compliance with applicable federal, state and foreign regulations.
In addition, any discovery of previously unknown problems with one of our
products or facilities may result in restrictions on the product or the
facility, including withdrawal of the product from the market or other
enforcement actions.
31
From time to time, legislative or regulatory proposals are introduced that
could alter the review and approval process relating to our products. It is
possible that the FDA will issue additional regulations further restricting the
sale of our proposed products. Any change in legislation or regulations that
govern the review and approval process relating to our future products could
make it more difficult and costly to obtain approval for new products, or to
produce, market, and distribute such products if approved.
WE CAN OFFER YOU NO ASSURANCE THE GOVERNMENT AND THE PUBLIC WILL ACCEPT OUR
LICENSED PATENTED TECHNOLOGIES. IF THEY DO NOT, WE WILL BE UNABLE TO GENERATE
SUFFICIENT REVENUES FROM OUR TECHNOLOGIES, WHICH MAY CAUSE US TO CEASE
OPERATIONS.
The commercial success of our replacement therapy and mutacin 1140
licensed technologies, that have been developed through biotechnology, will
depend in part on government and public acceptance of their production,
distribution and use. Biotechnology has enjoyed and continues to enjoy
substantial support from the scientific community, regulatory agencies and many
governmental officials in the United States and around the world. Future
scientific developments, media coverage and political events may diminish such
support. Public attitudes may be influenced by claims that health products
produced with biotechnology are unsafe for consumption or pose unknown risks to
the environment or to traditional social or economic practices. Securing
governmental approvals for, and consumer confidence in, such products poses
numerous challenges, particularly outside the United States. The market success
of technologies developed through biotechnology such as ours could be delayed or
impaired in certain geographical areas because of such factors. Products based
on our technologies may compete with a number of traditional dental therapies
and drugs manufactured and marketed by major pharmaceutical companies and other
biotechnology companies. Market acceptance of products based on our technologies
will depend on a number of factors including potential advantage over
alternative treatment methods. We can offer you no assurance that dentists,
physicians, patients or the medical and dental communities in general will
accept and utilize products developed from our technologies. If they do not, we
may be unable to generate sufficient revenues from our technologies, which may
cause us to have to cease operations.
WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS IF PRODUCTS BASED ON OUR
TECHNOLOGIES ARE MARKETED AND SOLD. BECAUSE OUR LIABILITY INSURANCE COVERAGE
WILL HAVE LIMITATIONS, IF A JUDGMENT IS RENDERED AGAINST US IN EXCESS OF THE
AMOUNT OF OUR COVERAGE, WE MAY HAVE TO CEASE OPERATIONS.
Because we are testing new technologies, and will be involved either
directly or indirectly in the manufacturing and distribution of the
technologies, we are exposed to the financial risk of liability claims in the
event that the use of the technologies results in personal injury or death.
There can be no assurance that we will not experience losses due to product
liability claims in the future, or that adequate insurance will be available in
sufficient amounts, at an acceptable cost, or at all. A product liability claim,
product recall or other claim, or claims for uninsured liabilities or in excess
of insured liabilities, may have a material adverse effect on our business,
financial condition and results of operations. Although we currently carry
$1,000,000 in general liability insurance, such insurance may not be sufficient
to cover any potential liability. We could be sued for a large sum of money and
held liable in excess of our liability coverage. If we cannot pay the judgment,
we may have to cease operations.
THERE IS UNCERTAINTY RELATING TO FAVORABLE THIRD-PARTY REIMBURSEMENT IN THE
UNITED STATES. IF WE CAN'T OBTAIN THIRD PARTY REIMBURSEMENT FOR PRODUCTS BASED
ON OUR TECHNOLOGIES, WE MAY HAVE TO CEASE OPERATIONS.
In the United States, success in obtaining payment for a new product from
third parties such as insurers depends greatly on the ability to present data
which demonstrates positive outcomes and reduced utilization of other products
or services as well as cost data which shows that treatment costs using the new
product are equal to or less than what is currently covered for other products.
If we fail to present such clinical data that will adversely affect our ability
to obtain favorable third party reimbursement, we will earn less revenue and we
may have to cease operations.
32
OUR STOCK PRICE HAS BEEN VOLATILE AND OUR TRADING VOLUME HAS BEEN LOW.
The trading price of our common stock has been, and may be, subject to
wide fluctuations in response to a number of factors, many of which are beyond
our control. These factors include:
o quarter-to-quarter variations in our operating results;
o the results of testing, technological innovations, or new commercial
products by us or our competitors;
o governmental regulations, rules, and orders;
o general conditions in the healthcare, dentistry, or biotechnology
industries;
o comments and/or earnings estimates by securities analysts;
o developments concerning patents or other intellectual property
rights;
o litigation or public concern about the safety of our products;
o announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
o additions or departures of key personnel;
o release of lock-up or other transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common
stock;
o potential litigation;
o adverse announcements by our competitors; and
o the additional sale of common stock by us in a capital raising
transaction.
Historically, the daily trading volume of our common stock has been
relatively low. We cannot guarantee that an active public market for our common
stock will be sustained or that the average trading volume will remain at
present levels or increase. In addition, the stock market in general, has
experienced significant price and volume fluctuations. Volatility in the market
price for particular companies has often been unrelated or disproportionate to
the operating performance of those companies. Broad market factors may seriously
harm the market price of our common stock, regardless of our operating
performance. In addition, securities class action litigation has often been
initiated following periods of volatility in the market price of a company's
securities. A securities class action suit against us could result in
substantial costs, potential liabilities, and the diversion of management's
attention and resources. Since our initial public offering and through March 12,
2004, our stock price has fluctuated from a high of $4.50 to a low of $1.69 per
share. To the extent our stock price fluctuates and/or remains low, it could
impair our ability to raise capital through the offering of additional equity
securities.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or the perception
that these sales could occur. In addition, these factors could make it more
difficult for us to raise funds through future offerings of common stock. As of
March 12, 2004, there were 13,407,530 shares of our common stock outstanding,
with another 1,111,700 shares of common stock issuable upon exercise of our
Series B warrants, 306,474 shares of common stock issuable upon exercise of our
underwriter warrants and 740,000 shares issuable upon exercise of options issued
or available for issuance under our stock option plans. The stock underlying
these options has been registered for resale with the SEC, including
approximately 1.2 million shares underlying currently unexercised but
"in-the-money" warrants held by certain investors. We currently have
approximately 6,913,028 shares of our common stock held in escrow pursuant to
Canadian law and underwriter requirements in connection with our initial public
offering pursuant to escrow agreements. These shares are released from escrow
periodically in three and six month increments and are subject to the
limitations of the respective escrow agreements. Of these shares, 6,150,573 are
held by principals of the Company, 449,955 are held by the University of Florida
Research Foundation, Inc. and 312,500 are held by other non-principal
shareholders.
WE MAY BE UNABLE TO MAINTAIN THE LISTING OF OUR COMMON STOCK ON THE TSX VENTURE
EXCHANGE TIER 2 AND PENNY STOCK RULES MAY APPLY TO THE SALE OF OUR COMMON STOCK
THAT, IN EACH CASE, WOULD MAKE IT MORE DIFFICULT FOR SHAREHOLDERS TO DISPOSE OF
THEIR COMMON STOCK.
33
Our common stock is listed on the TSX Venture Exchange Tier 2 in Canada.
We cannot guarantee that it will always be listed. The TSX Venture Exchange Tier
2 rules for continual listing include minimum market capitalization and other
requirements, which we may not meet in the future, particularly if the price of
our common stock declines.
If our common stock is delisted from the TSX Venture Exchange Tier 2,
trading in our common stock would be conducted, if at all, on the NEX Board of
the TSX Venture Exchange in Canada and on the NASD's OTC Bulletin Board in the
United States. This would make it more difficult for stockholders to dispose of
their common stock and more difficult to obtain accurate quotations on our
common stock. This could have an adverse effect on the price of our common
stock.
There are separate rules regulating United States broker-dealers who trade
on behalf of customers in unlisted stocks. These rules require broker-dealers
to:
o sell common stock only to purchasers for which transactions in penny
stocks are suitable unless such purchasers are established customers
as defined in Rule 15g-9 of the Securities Exchange Act of 1934;
o sell common stock only to purchasers that have sufficient knowledge
and experience in financial matters that the person reasonably may
be expected to be capable of evaluating the risks of transactions in
penny stock; and
o receive the purchaser's written consent to the transaction prior to
sale.
The United States Securities and Exchange Commission has adopted
regulations that define "penny stock" to include common stock that has a market
price of less than $5.00 per share, subject to certain exceptions. Our shares of
common stock are covered by the penny stock rules under Section 15(g) of the
Securities Exchange Act of 1934, as amended, and the related rules of the SEC.
They impose additional sales practice requirements on United States
broker/dealers who sell our securities. Broker-dealers engaging in the sale of
penny stocks must comply with, among other things, the following requirements:
o delivery to purchasers, prior to the transaction, of a risk
disclosure statement prepared by the Securities and Exchange
Commission relating to the penny stock market;
o disclosure to purchasers of the commissions payable to the
broker-dealer and its registered representative;
o disclosure to purchasers of current quotations for the securities;
and
o delivery to customers with monthly statements disclosing recent
price information for all penny stock held in the customer's account
and information on the limited market in penny stocks.
The broker must provide the bid and offer quotations and compensation
information before effecting the transaction. This information must be contained
in the customer's confirmation. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market for a
stock that is subject to the penny stock rules because of the lack of ability or
incentive of broker-dealers to sell our common stock.
Our shares are subject to the foregoing rules in the United States. The
foregoing rules apply to broker/dealers. The application of the penny stock
rules may affect your ability to resell your shares in the United States because
some broker/dealers may not be willing to make a market in our securities
because of the burdens imposed upon them by the penny stock rules. Also, the
broker prepares the information provided to the broker's customers. Because we
do not prepare the information, we cannot assure you such information is current
or complete.
Our common stock is defined as a penny stock under the Securities and
Exchange Act of 1934, and its rules. Because our common stock is a penny stock,
you may not be able to resell your shares in the United States. This is because
the Exchange Act and the penny stock rules impose additional sales practice and
disclosure requirements on broker/dealers who sell our securities to persons
other than accredited investors. As a result, fewer broker/dealers are willing
to make a market in our stock.
34
WE MUST MAINTAIN A CURRENT PROSPECTUS AND REGISTRATION STATEMENT IN ORDER FOR
OUR OUTSTANDING WARRANTS TO BE EXERCISED BY THEIR HOLDERS.
We must maintain an effective registration statement on file with the
Securities and Exchange Commission before the holder of any of our warrants may
be redeemed or exercised. It is possible that we may be unable to cause a
registration statement covering the common stock underlying the warrants to be
effective. We anticipate that we may need to meet state registration
requirements for sales of securities in states where an exemption from
registration is not otherwise available. The warrants may expire unexercised,
which would result in the holders losing all the value of their investment in
the warrants. There can be no assurance that we will be able to maintain an
effective registration statement covering the issuance of common stock upon
redemption or exercise of the warrants. If we are unable to maintain an
effective registration for the issuance of common stock upon exercise of the
warrants, we may be subject to claims by the warrant holders.
ITEM 7. FINANCIAL STATEMENTS.
Incorporated by reference to pages F-1 to F-14 at the end of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an
evaluation (the "Evaluation"), under the supervision and with the participation
of our President and Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of the design and operation of our disclosure
controls and procedures ("Disclosure Controls"). Based on the Evaluation, our
CEO and CFO concluded that, subject to the limitations noted below, our
Disclosure Controls are effective in timely alerting them to material
information required to be included in our periodic SEC reports.
CHANGES IN INTERNAL CONTROLS
We have also evaluated our internal controls for financial reporting, and
there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last evaluation.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including our CEO and CFO, does not expect that our
Disclosure Controls and internal controls will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of a simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management or
board override of the control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
35
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
CEO AND CFO CERTIFICATIONS
Appearing immediately following the Signatures section of this report
there are Certifications of the CEO and the CFO. The Certifications are required
in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section
302 Certifications). This Item of this report, which you are currently reading
is the information concerning the Evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
36
PART III
Certain information required by Part III is omitted from this Report in
that the Company expects to file a definitive proxy statement with the
Securities and Exchange Commission (the "Commission") within 120 days after the
end of its fiscal year pursuant to Regulation 14A, as promulgated by the
Commission, for its 2004 annual meeting of shareholders (the "Proxy Statement"),
and certain information included in the Proxy Statement will be incorporated
herein by reference.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item 9 with respect to identification of
our directors will be included under the captions "Proposal I Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" is
incorporated herein by reference to the Company's Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item 10 with respect to management
remuneration and transactions is incorporated herein by reference to the
Company's Proxy Statement under the heading "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 11 with respect to the security
ownership of certain beneficial owners and management is incorporated herein by
reference to the Company's Proxy Statement under the heading "Security Ownership
of Certain Beneficial Owners and Management.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 12 with respect to transactions
between us and certain related entities is incorporated herein by reference to
the Company's Proxy Statement under the heading "Certain Relationships and
Related Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
INCORPORATED BY REFERENCE
----------- -------------- ---------- -----------
EXHIBIT FILING FILED
NUMBER EXHIBIT DESCRIPTION FORM FILE NO EXHIBIT DATE HEREWITH
- ------ ------------------- ---- ------- ------- ---- --------
3.1 Articles of Incorporation SB-2 333-100568 3.1 10/16/02
3.2 Bylaws SB-2 333-100568 3.2 10/16/02
3.3 Amended Articles of Incorporation SB-2 333-100568 3.3 10/16/02
3.4 Amended Articles of Incorporation SB-2 333-100568 3.4 10/16/02
4.1 Specimen Stock Certificate SB-2 333-100568 4.1 10/16/02
4.3 Specimen Series B warrant certificate SB-2 333-100568 4.3 10/16/02
4.4 Specimen underwriter's warrant certificate SB-2 333-100568 4.4 10/16/02
10.1 License Agreement SB-2 333-100568 10.1 10/16/02
10.2 Amendment to License Agreement SB-2 333-100568 10.2 10/16/02
10.3 Second Amendment to License Agreement SB-2 333-100568 10.3 10/16/02
10.4 Third Amendment to License Agreement SB-2 333-100568 10.4 10/16/02
10.5 License Agreement SB-2 333-100568 10.5 10/16/02
10.6 Amendment to License Agreement SB-2 333-100568 10.6 10/16/02
10.7 Second Amendment to License Agreement SB-2 333-100568 10.7 10/16/02
37
EXHIBIT FILING FILED
NUMBER EXHIBIT DESCRIPTION FORM FILE NO EXHIBIT DATE HEREWITH
- ------ ------------------- ---- ------- ------- ---- --------
10.8 Equity Agreement SB-2/A-2 333-100568 10.8 2/10/03
10.11 First Amendment to Employment Agreement
with Jeffrey D. Hillman SB-2 333-100568 99.3 10/16/02
10.14 Incubator License Agreement - Office Lease SB-2 333-100568 99.5 10/16/02
10.15 First Amendment to Incubator License
Agreement SB-2 333-100568 99.6 10/16/02
10.16 Second Amendment to Incubator License
Agreement SB-2 333-100568 99.7 10/16/02
10.17 Series A and B Warrant Indenture SB-2/A-5 333-100568 10.17 12/23/02
10.18 Renewal Term for Incubator License Agreement SB-2 333-100568 99.8 10/16/02
10.19 Escrow Agreement between our principals,
ourselves and Computershare Trust Company SB-2 333-100568 99.10 10/16/02
10.20 Value Escrow Agreement between ourselves,
the University of Florida Research
Foundation, Inc. and Computershare Trust
Company SB-2 333-100568 99.11 10/16/02
10.21 Pooling Agreement between our non-Principal
shareholders and Haywood Securities Inc. SB-2/A-3 333-100568 10.21 4/9/03
10.22 Financing Agreement between ourselves and
Cornet Capital Corp. SB-2 333-100568 99.13 10/16/02
10.23 First Amendment to Financing Agreement
between ourselves and Cornet Capital Corp. SB-2 333-100568 99.15 10/16/02
10.24 Escrow Agreement between ourselves, Brian
McAlister and Sutherland, Asbill and Brennan SB-2 333-100568 99.14 10/16/02
10.25 First Amendment to Escrow Agreement between
ourselves, Brian McAlister and Sutherland,
Asbill and Brennan SB-2/A-1 333-100568 10.25 12/23/02
10.26 Stock Option Plan SB-2 333-100568 99.16 10/16/02
10.27 Transfer Agent, Registrar and Dividend
Disbursing Agent Agreement for Common Stock SB-2/A-3 333-100568 10.27 4/9/03
10.28 Warrant Agreement and Registrar
Agreement SB-2/A-1 333-100568 10.28 12/23/02
10.29 Registration Rights Agreements between
ourselves and Cleo Christine Allan, James
Butler, Quickswood Ltd., Ernest Mario,
Amelia Investments Ltd. and Angel
Investment Company Ltd. SB-2/A-3 333-100568 10.29 4/9/03
10.31 Proprietary Information Agreements between
ourselves and Brian Anderson, Brian
McAlister, Robert Zahradnik, Howard
Kuramitsu, and Steven Projan SB-2 333-100568 99.23 10/16/02
10.32 Confidential Information Agreement between
us and Paul Hassie SB-2 333-100568 99.24 10/16/02
38
EXHIBIT FILING FILED
NUMBER EXHIBIT DESCRIPTION FORM FILE NO EXHIBIT DATE HEREWITH
- ------ ------------------- ---- ------- ------- ---- --------
10.34 Second Amendment to Financing Agreement
between ourselves and Cornet Capital Corp. SB-2/A-5 333-100568 10.34 5/5/03
10.36 Fourth Amendment to License Agreements SB-2/A-3 333-100568 10.36 4/9/03
10.37 Agreement between Dr. Robert Zahradnik and
ourselves under which Dr. Zahradnik has
agreed not to seek repayment of certain
loans from the proceeds of the initial
public offering SB-2/A-3 333-100568 10.37 4/9/03
10.38 Agreement between Dr. Jeffrey Hillman and
ourselves under which Dr. Hillman has
agreed not to seek repayment of certain
loans from the proceeds of the initial
public offering SB-2/A-3 333-100568 10.38 4/9/03
10.39 Promissory Note with principal amount of
$100,000 payable to Cornet Capital Corp. SB-2/A-3 333-100568 10.39 4/9/03
10.40 Second Amendment to Escrow Agreement SB-2/A-3 333-100568 10.40 4/9/03
10.41 Promissory Note with principal amount of
$75,000 payable to Cornet Capital Corp. SB-2/A-5 333-100568 10.41 5/5/03
10.42 Employment agreement of Mento Soponis X
10.43 Employment agreement of Jeffrey Hillman X
10.44 Employment agreement of Paul Hassie X
10.45 Consultancy Agreement between us and Health
Decisions, Inc. X
23.1 Consent of Ernst & Young LLP X
31.1 Rule 13a-14(a)/15d-14(a) Certification X
31.2 Rule 13a-14(a)/15d-14(a) Certification X
32.1 Section 1350 Certifications X
32.2 Section 1350 Certifications X
(b) Reports on Form 8-K:
The Company filed Form 8-K's on October 2, 2003, October 24, 2003 and
November 3, 2003, relating to (i) the press release announcing the appointment
of David J. Gury, to the board of directors; (ii) the press release for the
quarterly results filed pursuant to Regulation FD; and, (iii) the press release
announcing the grant of stock options to Paul Hassie and Brian Anderson,
respectively.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item 14 is incorporated herein by
reference to the Company's Proxy Statement under the heading "Principal
Accountant Fees and Services."
39
Oragenics, Inc.
Financial Statements
Years ended December 31, 2003 and 2002
CONTENTS
Report of Independent Certified Public Accountants..............................................................F-1
Audited Financial Statements
Balance Sheet..............................................................................................F-2
Statements of Operations...................................................................................F-3
Statements of Changes in Stockholders' Equity (Deficit)....................................................F-4
Statements of Cash Flows...................................................................................F-5
Notes to Financial Statements..............................................................................F-6
Report of Independent Certified Public Accountants
Board of Directors
Oragenics, Inc.
We have audited the accompanying balance sheet of Oragenics, Inc. as of December
31, 2003, and the related statements of operations, changes in stockholders'
equity (deficit) and cash flows for each of the two years in the period ended
December 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Oragenics, Inc. at December 31,
2003, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.
January 30, 2004
Tampa, Florida
F-1
Oragenics, Inc.
Balance Sheet
December 31, 2003
(In US Dollars)
ASSETS
Current assets:
Cash and cash equivalents $ 3,583,757
Prepaid expenses 24,637
-----------
Total current assets 3,608,394
Equipment 42,371
-----------
Total assets $ 3,650,765
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 140,614
Accrued interest 25,582
Deferred compensation 44,672
-----------
Total current liabilities 210,868
Stockholders' equity:
Preferred stock, no par value; 20,000,000 shares
authorized;
none issued and outstanding -
Common stock, $0.001 par value; 100,000,000 shares
authorized;
13,296,204 shares issued and outstanding 13,296
Additional paid in capital 5,820,697
Accumulated deficit (2,394,096)
-----------
Total stockholders' equity 3,439,897
-----------
Total liabilities and stockholders' equity $ 3,650,765
===========
See accompanying notes.
F-2
Oragenics, Inc.
Statements of Operations
(In US Dollars)
YEAR ENDED DECEMBER 31
2003 2002
-----------------------------
Revenue $ $
- -
Operating expenses:
Research and development 929,355 310,007
General and administration 738,596 399,693
-----------------------------
Total operating expenses 1,667,951 709,700
-----------------------------
Loss from operations (1,667,951) (709,700)
Other income (expense):
Interest income 7,874 2,169
Interest expense (12,877) (8,072)
-----------------------------
Total other expense, net (5,003) (5,903)
-----------------------------
Loss before income taxes (1,672,954) (715,603)
Income tax benefit - 16,000
-----------------------------
Net loss $ (1,672,954) $ (699,603)
=============================
Basic and diluted net loss per share $ (0.15) $ (0.08)
=============================
Shares used to compute basic and diluted
net loss per share 10,814,198 8,884,239
=============================
See accompanying notes.
F-3
Oragenics, Inc.
Statements of Changes in Stockholders' Equity (Deficit)
(In US Dollars)
Common Stock Additional Total
------------------------- Paid In Accumulated Stockholders'
Shares Amount Capital Deficit Equity (Deficit)
------------------------------------------------------------------------
Balance at January 1, 2002 7,512,048 $ 7,512 - $ (21,539) $ (14,027)
Issuance of common stock 1,913,656 1,914 628,234 - 630,148
Net loss - - - (699,603) (699,603)
------------------------------------------------------------------------
Balance at December 31, 2002 9,425,704 9,426 628,234 (721,142) (83,482)
Net loss - - - (1,672,954) (1,672,954)
Issuance of common stock and warrants 2,500,000 2,500 2,280,112 - 2,282,612
Exercise of common stock warrants 1,370,500 1,370 2,628,817 - 2,630,187
Compensation expense relating to option
issuances - - 283,534 - 283,534
------------------------------------------------------------------------
Balance at December 31, 2003 13,296,204 $ 13,296 $ 5,820,697 $ (2,394,096) $ 3,439,897
========================================================================
See accompanying notes.
F-4
Oragenics, Inc.
Statements of Cash Flows
(In US Dollars)
YEAR ENDED DECEMBER 31
2003 2002
------------------------------
OPERATING ACTIVITIES
Net loss $ (1,672,954) $ (699,603)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 12,545 1,585
Non-cash issuance of common stock and common
stock options 54,000 122,148
Stock-based compensation expense 229,534 -
Changes in operating assets and liabilities:
Costs associated with initial public
offering 271,937 (271,937)
Prepaid expenses (15,896) (8,741)
Accounts payable and accrued expenses (92,197) 162,772
Accrued interest 8,120 8,072
Income tax payable - (16,000)
Deferred compensation (13,999) 24,262
------------------------------
Net cash used in operating activities (1,218,910) (677,442)
INVESTING ACTIVITY
Purchases of equipment (50,258) (5,458)
------------------------------
Net cash used in investing activity (50,258) (5,458)
FINANCING ACTIVITIES
Proceeds from notes payable to stockholders 175,000 -
Payment of notes payable to stockholders (260,454) -
Net proceeds from issuance of common stock 4,912,799 508,000
------------------------------
Net cash provided by financing activities 4,827,345 508,000
------------------------------
Net increase (decrease) in cash and cash
equivalents 3,558,177 (174,900)
Cash and cash equivalents at beginning of period 25,580 200,480
------------------------------
Cash and cash equivalents at end of
period $ 3,583,757 $ 25,580
==============================
NON-CASH FINANCING ACTIVITIES
Common stock issued in connection with
amendment to officer employment agreement $ - $ 122,148
==============================
Common stock and common stock options
issued in connection with investment bank
and related financing services $ 54,000 $ 192,016
==============================
Interest paid $ 4,757 $ -
==============================
See accompanying notes.
F-5
Oragenics, Inc.
Notes to Financial Statements
December 31, 2003
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Oragenics, Inc. (the Company) (formerly known as Oragen, Inc.) was incorporated
in November 1996 and operating activity commenced in 1999. The Company is
dedicated to developing technologies associated with oral health, broad spectrum
antibiotics and other general health benefits.
BASIS OF PRESENTATION
The financial statements of the Company, which have been prepared in accordance
with accounting principles generally accepted in the United States, conform in
all material respects with accounting principles generally accepted in Canada.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMER
The Company's cash and cash equivalents are deposited in one financial
institution and consist of demand deposits and overnight repurchase agreement
investments.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash and cash equivalents, accounts payable and
accrued expenses approximate their carrying values due to their short-term
nature.
F-6
Oragenics, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
EQUIPMENT
Equipment is recorded at its acquisition cost. Depreciation is computed
utilizing the declining balance and straight-line methods over the estimated
useful lives (three years) of the related assets.
BUSINESS SEGMENTS
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosure About Segments of a Business Enterprise and Related Information, the
Company is required to report segment information. As the Company only operates
principally in one business segment, no additional reporting is required.
STOCK-BASED COMPENSATION
The Company has a stock-based employee compensation plan, which is described
more fully in Note 5. The Company accounts for the plan under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. The following table illustrates the
effect on net loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
F-7
Oragenics, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
YEARS ENDED DECEMBER 31
2003 2002
-----------------------------
(in US Dollars)
Net loss, as reported $ (1,672,954) $ (699,603)
Add: Total stock-based employee
compensation expense reported in net
loss 229,534
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (44,371) (2,925)
------------------------------
Pro forma net loss $ (1,487,791) $ (702,528)
==============================
Earnings per share:
Basic and diluted - as reported $(0.15) $(0.08)
Basic and diluted - pro forma $(0.14) $(0.08)
COMMON STOCK SPLIT
On March 25, 2002, the Board of Directors approved a 108 to 1 stock split of all
outstanding shares. All share and per share information included in the
financial statements has been retroactively adjusted to reflect this split. The
Board of Directors approved an increase to the authorized shares of the
preferred stock to 20,000,000 and to increase the authorized shares of common
stock to 100,000,000.
NET LOSS PER SHARE
The weighted-average shares outstanding include all common stock issued. In
computing diluted loss per share, outstanding common stock options and warrants
representing 2,279,500 and 315,000 common shares for the year ended December 31,
2003 and 2002, respectively, were excluded from the diluted loss per share
computation because their effects would have been anti-dilutive.
RESEARCH AND DEVELOPMENT EXPENSES
Expenditures for research and development are expensed as incurred. The majority
of the Company's activities are research and development related.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating and
tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rate is recognized in
operations in the period that includes the enactment date. Deferred tax assets
are reduced to estimated amounts to be realized by the use of a valuation
allowance.
F-8
Oragenics, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46") that requires the consolidation of
variable interest entities, as defined. FIN 46, as revised, is applicable to
financial statements of companies that have interests in "special purpose
entities," as defined, during 2003. FIN 46 is applicable to financial statements
of companies that have interests in all other types of entities, in first
quarter 2004. However, disclosures are required currently if the Company expects
to consolidate any variable interest entities. The Company does not currently
believe that any material entities will be consolidated with it as a result of
FIN 46.
The Company adopted SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity ("SFAS 150") on July 1,
2003. SFAS 150 establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity, such as redeemable
preferred stock and certain equity derivatives that frequently are used in
connection with share repurchase programs. The Company's adoption of SFAS 150
did not have a material impact on its results of operation or financial
position. On October 29, 2003, the FASB voted to defer for an indefinite period
the application of SFAS 150 to classification of non-controlling interests of
limited-life subsidiaries. The deferral did not have a material impact on the
Company's results of operations or financial position.
2. EQUIPMENT
Equipment consists of the following as of December 31, 2003 (in US Dollars):
Computer equipment $ 58,976
Accumulated depreciation (16,605)
-----------
$ 42,371
===========
Depreciation expense for 2003 and 2002 was $12,545 and $1,585, respectively.
3. NOTES PAYABLE TO STOCKHOLDERS
The Company issued promissory notes for cash to two stockholders in the amounts
of $69,604 and $15,000 in 2001 and 1999, respectively. These notes were payable
upon demand and accrued interest at 7% per year. The principal portion of the
notes was repaid in December 2003 and related accrued interest totaling $18,452
was paid in January 2004.
In 2003 the Company issued two demand promissory notes to a stockholder in the
amounts of $100,000 and $75,000 bearing interest at 10% per annum. Both notes
and interest totaling $4,757 were repaid in June 2003.
F-9
Oragenics, Inc.
Notes to Financial Statements (continued)
4. DEFERRED COMPENSATION
During 2000, the Company entered into a two-year employment agreement with an
officer and shareholder. The agreement provided for the deferral of compensation
until a certain level of investment funding is received and requires the Company
to accrue interest on the deferred balance at 7% per year. Beginning July 1,
2001, the agreement was amended whereby the deferral of compensation ceased. At
December 31, 2003, deferred compensation plus accrued interest totaled $41,539.
No compensation expense was recognized in 2003 or 2002 and interest expense
relating to the employment agreement for the years ended December 31, 2003 and
2002 was $2,409 and $2,530, respectively. In January 2004, payments totaling
$41,539 were made in settlement of this obligation.
Between December 2002 and June 2003, compensation payments totaling $149,263 to
three officers of the Company were deferred due to limited cash flow of the
Company. As of December 31, 2003, payments of $139,000 were made and the balance
of $10,263 was paid in January 2004. There is no provision to pay interest on
these deferred compensation payments.
5. STOCK OPTIONS
The Company's 2002 Stock Option and Incentive Plan (the Plan) was adopted by the
Board of Directors (the Board). The purpose is to advance the interests of the
Company by affording certain employees and directors of the Company and key
consultants and advisors an opportunity to acquire or increase their proprietary
interests in the Company. The Plan authorizes the grant of stock options
(incentive and non-statutory), stock appreciation rights and restricted stock.
As of December 31, 2003, the Company had not awarded stock appreciation rights
or restricted stock under the Plan. The Company has reserved an aggregate of
1,000,000 shares of common stock for grants under the Plan, of which 250,000
shares are available for future grants as of December 31, 2003. The exercise
price of each option shall be determined by the Board and an option's maximum
term is five years.
In September 2002, the Company issued 195,000 options that were re-priced upon
the change in the initial public offering (See Note 10) price. As a result,
these options were subjected to variable accounting treatment. In accordance
with Financial Accounting Standards Board Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation (FIN 44), stock options must
be accounted for as variable under such circumstances. Variable accounting
requires companies to re-measure compensation costs for the variable options
until the options are exercised, cancelled, or forfeited without replacement.
Compensation is dependent on fluctuations in the quoted stock prices for the
Company's common stock. Such compensation costs will be recognized over a
three-year vesting schedule until the options are fully vested, exercised,
cancelled, or forfeited, after which time the compensation will be recognized
immediately at each reporting period. During 2003, the Company recognized
$229,534 of compensation expense.
F-10
Oragenics, Inc.
Notes to Financial Statements (continued)
5. STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's outstanding stock options, including
employee stock options discussed above, as of December 31, 2003 and 2002 and
changes during the periods ending on those dates is presented below:
Weighted
Option Average
Price Per Exercise
Options Share Price
--------------------------------------
Outstanding at January 1, 2002 - -
Granted 315,000 $ 1.25 $ 1.25
--------------------------------------
Outstanding at December 31, 2002 315,000 1.25 1.25
Granted 285,000 2.65 - 4.00 3.29
--------------------------------------
Outstanding at December 31, 2003 600,000 $ 2.22
======================================
Exercisable at end of year 155,000 $1.25 - 4.00 $ 2.14
======================================
The range of exercise price is $1.25 to $4.00 per share. The weighted-average
per option fair value of options granted during 2003 and 2002 was $1.26 and
$.12, respectively, and the weighted average remaining contractual life of those
options is 4.3 years. Options vest over a period of three to four years from
respective grant dates and the options expire 5 years after the date of grant.
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: weighted average risk-free interest rate of 1.00-2.87%; dividend
yields of 0%; weighted-average volatility factors of the expected market price
of the Company's common stock of 55%; and an expected life of the option of four
years.
6. RETIREMENT PLAN
During 2001, the Company established a defined contribution retirement plan that
covers substantially all of the employees of the Company. The plan generally
allows for employer contributions up to 15% of each employee's salary, limited
to $30,000 per year. Employees may also contribute up to $2,000 to the plan
annually. Employees are fully vested in all contributions made to the plan.
There was no expense related to the plan in 2003 and 2002.
In January 2004, the Company established a new defined contribution retirement
plan covering all employees and providing for a Company match of up to 3% of all
employee contributions to the plan. During 2004, employee contributions are
limited to $9,000 except for individuals 50 years or older for which the
contribution limitation is $10,500.
F-11
Oragenics, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES
The components of income tax benefit are as follows:
YEAR ENDED DECEMBER 31
2003 2002
-------------------------
(In US Dollars)
Current - federal $ - $ (14,000)
Current - state - (2,000)
-------------------------
Total $ - $ (16,000)
=========================
At December 31, 2003, the Company had temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and their
respective income tax bases, as measured by enacted state and federal tax rates,
as follows (In US Dollars):
Deferred tax assets:
Net operating loss carryforward $ 753,911
Consulting services 28,223
Non qualified stock options 46,897
Tax credit 48,724
--------------
Total deferred tax assets 877,755
Less valuation allowance (877,755)
--------------
Total net deferred taxes $ -
==============
The following is a reconciliation of tax computed at the statutory federal rate
to the income tax benefit in the statements of operations for the years ended
December 31, 2003 and 2002:
YEAR ENDED DECEMBER 31
2003 2002
-------------------------
(In US Dollars)
Income tax benefit computed at
statutory federal rate of 34% $ (568,804) $ (243,305)
State income tax benefits, net of
federal expense/benefit (60,728) (25,947)
Change in valuation allowance 596,049 263,604
Non-deductible expenses 60,303 274
Research and development credit (32,512) 16,212
Other 5,692 (26,838)
-------------------------
Total $ - $ (16,000)
=========================
F-12
Oragenics, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
SFAS No. 109, Accounting for Income Taxes, requires a valuation allowance to
reduce the deferred tax assets reported if, based on the weight of the evidence,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. After consideration of all of the evidence, both positive
and negative, management has determined that a valuation allowance of $877,755
at December 31, 2003 is necessary to reduce the deferred tax assets to the
amount that will more likely than not be realized. The change in the valuation
allowance for the year ended December 31, 2003 was $596,049. At December 31,
2003, the Company has available net operating loss carryforwards of $2,003,484,
which begin to expire in 2022.
In connection with the initial public offering, it is possible that the Company
experienced a change in control within the meaning of Section 382 of the
Internal Revenue Code. If so, the ability of the Company to use its net
operating losses may be limited and subject to annual limitation that could
result in the expiration of some net operating losses prior to utilization.
8. LEASE OF FACILITIES
The Company leases its laboratory and office space, as well certain equipment,
under a 12-month cancelable operating lease with annual renewal options. Total
rent expense under this lease was $33,583 and $18,506 for the years ended
December 31, 2003 and 2002, respectively. The lease agreement ends in March
2004. The minimum lease payments that are due through the formal lease
termination date in 2004 are $11,000.
DIn January 2004, the Company entered into an agreement with a real estate
developer to have a facility built that the Company will lease from the
developer for a term of five years. The expected completion date is in July
2004. The agreement requires the Company to pay a deposit of $6,400 and provides
for monthly lease payments of $6,400, exclusive of utilities, insurance and real
estate taxes.
9. TRANSACTIONS WITH RELATED PARTIES
Costs incurred for consulting services provided by a stockholder of the Company
during 2002 were approximately $15,000. At December 31, 2003 and 2002, $75,000
was owed and included in accounts payable and accrued expenses. No interest is
being accrued on this outstanding debt.
The Company has two license agreements with the University of Florida Research
Foundation, Inc. ("UFRF") for their technologies. The Company issued 599,940
shares of common stock as partial consideration. The license agreements provide
for, among other things, the Company to make minimum annual research
expenditures of $600,000 in 2003 and $1,000,000 thereafter, to adhere to
specific milestones and pay royalties on product sales, which beginning December
31, 2005 will be a minimum of $50,000 annually per agreement. The agreement also
required the Company to pay $100,000 to UFRF as reimbursement for patent filing
costs upon the closing of any financing in excess of $1,000,000. If the Company
fails to perform certain of its obligations, UFRF may terminate the license
agreements. Upon completion of the initial public offering in June 2003 (See
Note 10), the Company paid UFRF $100,000.
F-13
Oragenics, Inc.
Notes to Financial Statements (continued)
10. INITIAL PUBLIC OFFERING
On June 24, 2003, the Company completed the filing of 2,400,000 units at $1.25
per unit as an initial public offering (IPO) for gross proceeds of $3,000,000.
Each unit consisted of one share of the Company's common stock, one-half Series
A Common Share Purchase Warrant and one-half Series B Common Share Purchase
Warrant. One whole Series A warrant allowed the holder to purchase a share of
the Company's stock at $2.00 per share until December 24, 2003. All Series A
warrants were exercised before the expiration date providing proceeds to the
Company of $2,400,000. One whole Series B warrant allows the holder to purchase
a share of the Company's stock at $3.00 per share until March 24, 2004. As of
December 31, 2003, 9,750 Series B warrants were exercised providing proceeds to
the Company of $29,250. In addition to receiving a cash commission for each
share sold, the underwriting agent for the IPO received 100,000 shares of common
stock of the Company and warrants to purchase 500,000 shares of common stock of
the Company at $1.25 per share until June 24, 2005. As of December 31, 2003,
160,750 underwriter warrants were exercised providing proceeds to the Company of
$200,937. The cost of the IPO was $717,388 including the agent's commission.
11. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The quarterly interim financial information shown below has been prepared by the
Company's management and is unaudited. It should be read in conjunction with the
audited financial statements appearing herein (In US Dollars).
2003
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
Total operating expenses.... $ 207,899 $ 432,440 $ 398,426 $ 629,186
Net loss.................... (211,442) (437,319) (396,722) (627,471)
Loss per share:
Basic....................... $ 0.02 $ 0.05 $ 0.03 $ 0.05
Diluted..................... $ 0.02 $ 0.05 $ 0.03 $ 0.05
2002
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
Total operating expenses.... $ 206,037 $ 130,784 $ 170,752 $ 202,127
Net loss.................... (207,773) (131,943) (171,942) (187,945)
Loss per share:
Basic....................... $ 0.03 $ 0.01 $ 0.02 $ 0.02
Diluted..................... $ 0.03 $ 0.01 $ 0.02 $ 0.02
F-14
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 17, 2004
ORAGENICS, INC.
--------------
(Registrant)
By: /s/ Mento A. Soponis
------------------------------------------------------
Mento A. Soponis, Chief Executive Officer and President
By: /s/ Paul A. Hassie
------------------------------------------------------
Paul A. Hassie, Chief Financial Officer, Secretary and
Treasurer (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ Mento A. Soponis Chief Executive Officer March 17, 2004
- ----------------------------- and President
Mento A. Soponis
/s/ Paul A. Hassie Chief Financial Officer March 17, 2004
- -----------------------------
Paul A. Hassie
/s/ Robert T. Zahradnik Director March 17, 2004
- -----------------------------
Robert T. Zahradnik
/s/ Jeffrey D. Hillman Director March 17, 2004
- -----------------------------
Jeffrey D. Hillman
/s/ Brian McAlister Director March 17, 2004
- -----------------------------
Brian McAlister
/s/ Brian Anderson Director March 17, 2004
- -----------------------------
Brian Anderson
/s David J. Gury Director March 17, 2004
- -----------------------------
David J. Gury
55