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FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended March 31, 2005.
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the
transition period from ________ to __________
Commission File Number: 000-50614
ORAGENICS, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-3410522
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13700 Progress Boulevard
Alachua, Florida 32653
(Address of principal executive offices)
(386) 418-4018
(Issuer's telephone number)
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.
Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of May 13, 2005, there were 14,597,224 shares of Common Stock, $.001 par
value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004 3
Statements of Operations for the Three Months ended March 31, 2005 and 2004
(unaudited) 4
Statements of Cash Flows for the Three Months ended March 31, 2005 and 2004
(unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operations 10
Item 3. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities 29
Item 6. Exhibits 29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Oragenics, Inc.
Balance Sheets
March 31, December 31,
2005 2004
-------------- --------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,381,383 $ 3,666,244
Prepaid expenses and other current assets 209,018 108,895
-------------- --------------
Total current assets 2,590,401 3,775,139
Property and equipment, net 1,203,591 690,932
-------------- --------------
Total assets $ 3,793,992 $ 4,466,071
============== ==============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 277,544 $ 429,627
Current portion of notes payable 192,858 --
-------------- --------------
Total current liabilities 470,402 429,627
Long term liabilities:
Notes payable 363,503 --
-------------- --------------
Total liabilities 833,905 429,627
Stockholders' equity:
Preferred stock, no par value; 20,000,000 shares authorized;
none issued and outstanding at March 31, 2005 and December
31, 2004 -- --
Common stock, $0.001 par value; 100,000,000 shares authorized;
14,597,224 and 14,594,924 shares issued and outstanding at
March 31, 2005 and December 31, 2004, respectively 14,597 14,595
Additional paid in capital 9,283,604 9,493,833
Accumulated deficit (6,338,114) (5,471,984)
-------------- --------------
Total stockholders' equity 2,960,087 4,036,444
-------------- --------------
Total liabilities and stockholders' equity $ 3,793,992 $ 4,466,071
============== ==============
See accompanying notes.
3
Oragenics, Inc.
Statements of Operations
(Unaudited)
Three months ended
March 31
----------------------------
2005 2004
------------ ------------
Revenue $ -- $ --
Operating expenses:
Research and development 647,186 262,295
General and administration 231,919 282,166
------------ ------------
Total operating expenses 879,105 544,461
------------ ------------
Loss from operations (879,105) (544,461)
Other income (expense):
Interest income 14,620 7,021
Interest expense (1,645) --
------------ ------------
Total other income (expense), net 12,975 7,021
------------ ------------
Net loss $ (866,130) $ (537,440)
============ ============
Basic and diluted net loss per share $ (0.06) $ (0.04)
============ ============
Shares used to compute basic and diluted net loss
per share 14,596,866 13,413,558
============ ============
See accompanying notes.
4
Oragenics, Inc.
Statements of Cash Flows
(Unaudited)
Three months ended March 31
----------------------------
2005 2004
------------ ------------
Operating activities
Net loss $ (866,130) $ (577,440)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 48,803 5,163
Stock-based compensation expense (credit) (213,102) (9,445)
Changes in operating assets and liabilities:
Prepaid expenses (100,123) (2,322)
Accounts payable and accrued expenses (152,083) 69,166
Accrued interest -- (25,582)
Deferred compensation -- (44,672)
------------ ------------
Net cash used in operating activities (1,282,635) (545,132)
Investing activity
Purchases of property and equipment (561,462) (24,212)
------------ ------------
Net cash used in investing activity (561,462) (24,212)
Financing activities
Net proceeds from issuance of common stock 2,875 2,997,906
Proceeds from note payable 556,361 --
------------ ------------
Net cash provided by financing activities 559,236 2,997,906
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,284,861) 2,428,562
Cash and cash equivalents at beginning of period 3,666,244 3,583,757
------------ ------------
Cash and cash equivalents at end of period $ 2,381,383 $ 6,012,319
============ ============
See accompanying notes.
5
Oragenics, Inc.
Notes to Financial Statements
(Unaudited)
1. Organization and Significant Accounting Policies
Oragenics, Inc. (formerly known as Oragen, Inc.) (the Company) was
incorporated in November 1996; however, operating activity did not commence
until 1999. We are dedicated to developing technologies associated with oral
health, broad spectrum antibiotics and general health benefits.
Basis of Presentation
The accompanying unaudited condensed financial statements as of and for
the three months ended March 31, 2005 and 2004 have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP) for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, the accompanying financial statements include all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the financial condition, results of operations and cash flows
for the periods presented. The results of operations for the interim period
March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2005 or any future period.
t 6 0 These financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
2004 which are included in our Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on March 14, 2005. In that report the Company
disclosed that it expects to incur substantial expenditures to further develop
each of its technologies. It further stated that it believed its working capital
will be insufficient to meet the business objectives as presently structured and
without sufficient capital to fund its operations, the Company will be unable to
continue as a going concern. In February 2005, the Company entered into an
agreement with an investment advisory firm to assist in raising additional
capital by acting as a financial advisor and placement agent. Although the
Company is continuing to work with the investment advisory firm, there can be no
assurance that additional financing will be available on acceptable terms, or at
all. Without sufficient capital to fund our operations, we will be unable to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
6
Oragenics, Inc.
Notes to Financial Statements
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
Stock-Based Compensation
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure (FAS 148). FAS 148 amends an earlier standard on accounting for
stock-based compensation, Accounting for Stock-Based Compensation (FAS 123), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, FAS 148 amends the disclosure requirements of FAS 123 to require more
prominent disclosure about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
continues to follow the intrinsic value method of accounting as prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, to account for employee stock options issued.
The following table illustrates the effects on net loss and net loss per
share as if the Company had applied the fair value recognition provisions of FAS
123 to stock-based employee compensation.
Three months ended
March 31
2005 2004
------------ ------------
Net loss, as reported $ (866,130) $ (537,440)
Less: Effect of stock-based employee compensation expense
(credit) included in reported net loss (213,102) (9,445)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards (58,455) (30,747)
------------ ------------
Pro forma net loss $ (1,137,687) $ (577,632)
============ ============
Net loss per share:
Basic and diluted --as reported $ (0.06) $ (0.04)
============ ============
Basic and diluted --pro forma $ (0.08) $ (0.04)
Shares used to compute basic and diluted net loss per
share 14,596,866 13,413,558
============ ============
7
Oragenics, Inc.
Notes to Financial Statements
(Unaudited)
2. 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 allowed the
holder to purchase a share of the Company's stock at $3.00 per share until March
24, 2004. A total of 995,400 Series B warrants were exercised on or before March
24, 2004 providing proceeds of $2,986,200 and the remaining 204,600 Series B
warrants expired unexercised on March 24, 2004. 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 March 31, 2005, 226,120 underwriter warrants were exercised providing
proceeds to the Company of $282,650. The cost of the IPO, including the filing
of a post effective amended registration statement in October 2004, was $779,809
including the agent's commission.
Through March 31, 2005 we have applied a total of $6,284,768 of the
$7,889,041 in net proceeds from our initial public offering as follows:
Reduction of notes payable and accrued interest thereon to directors
and officers:
Brian McAlister (Cornet Capital Corp.) $ 179,757
Robert Zahradnik 88,477
Jeffrey Hillman 15,429
Deferred compensation payable to officers 189,302
Patent expenses paid to University of Florida 100,000
Regulatory consulting and clinical trial costs 552,488
Mutacin 1140 production research 535,564
Pre-clinical research 1,966,564
General and administration costs 1,937,040
Purchase of computer and laboratory equipment 720,147
----------
$6,284,768
Other than normal and recurring compensation and payment 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. Management believes that
the Company has used, and continues to use, the net proceeds from the offering
consistent with its business strategy described in the Form SB-2 registration
statement.
8
Oragenics, Inc.
Notes to Financial Statements
(Unaudited)
3. Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded as their effect is anti-dilutive.
4. Note Payable
On February 24, 2005, the Company entered into a Business Loan Agreement
with a bank that will fund approximately $615,000 of laboratory equipment
purchases. The loan has a term of 37 months with the first month's payment of
interest only and the remaining monthly payments of principal and interest of
approximately $18,900 per month. Interest will be calculated at the prime rate
as published in the Wall Street Journal (5.75% at March 31, 2005) plus 1.00%.
Interest can never be below 5.75% or above 17.5%. The loan is collateralized by
the equipment being purchased, as well as all equipment currently owned by the
Company and the agreement requires the Company to maintain working capital of
$750,000. During the quarter ended March 31, 2005, the Company incurred interest
of $1,645 on the outstanding principal of $556,361. It is anticipated that the
Company will draw approximately $59,000 in additional proceeds under the terms
of this loan in the second quarter of 2005.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following information should be read in conjunction with the Financial
Statements, including the notes thereto, included elsewhere in this Form 10-QSB,
and the Management's Discussion and Analysis of Financial Condition and Results
of Operations included in our 2004 Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on March 14, 2005.
Overview
We are an emerging, early-stage 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 strategy is to in-license
and to develop products through human proof-of-concept studies (Phase I and II
clinical trials of the U.S. Food and Drug Administration's regulatory process)
prior to partnering with major pharmaceutical, biotechnology or healthcare
product firms for advanced clinical development and commercialization. Since
inception, we have funded a significant portion of our operations from the
public and private sales of our securities. We have generated no significant
revenues from operations during the last two years. All of our revenues have
been from a sponsored research agreement and SBIR grants which have expired. We
have not generated revenues from sales of products.
We are currently seeking to develop several products, each of which
address potentially large market opportunities:
Replacement therapy is a single, painless one-time topical treatment
that has the potential to offer lifelong protection against dental caries
(tooth decay). The therapy is based on genetically altering the bacterium,
Streptococcus mutans, which is the primary etiologic agent in tooth decay.
Present in the normal flora of the mouth, Streptococcus mutans converts
dietary sugar to lactic acid; the lactic acid, in turn, causes the erosion
of tooth enamel that results in the destruction of the tooth surface and
eventually the entire tooth. Replacement therapy permanently replaces
resident acid-producing Streptococcus mutans with a patented, genetically
engineered strain of Streptococcus mutans that does not produce lactic
acid. Applied topically to tooth surfaces with a swab, the therapy
requires only one application. We have begun Phase I clinical trials and
expect to partner with a major healthcare products or pharmaceutical
company prior to initiating later stages of clinical testing.
Probiotics are live microorganisms that confer health benefits to
the host when administered in adequate amounts; the use of yogurt
containing live Lactobacillus cultures is an example of a probiotic
application. We have identified three natural strains of bacteria that
provide significant protection against the causative organisms of
periodontal disease and dental caries. Because probiotic treatments may be
marketed as "health supplements" without the need for extensive regulatory
oversight, we believe that we may achieve commercialization of our
probiotic product in certain markets in 2006. If successfully developed,
our oral rinse product will be one of the first probiotics to be marketed
for the maintenance of oral health.
Mutacin 1140 is a highly potent bactericidal peptide that is
produced by our strain of Streptococcus mutans. Our proprietary mutacin
bacteria was discovered by our researchers during the course of developing
replacement therapy and is a novel antibiotic that has broad-spectrum
10
antimicrobial activity against essentially all Gram-positive bacteria
including vancomycin-resistant Staphylococcus aureus. The antibiotic
currently is in preclinical stages of development. We currently plan to
wait to begin animal studies until we obtain sufficient financial
resourses. See Liquidity and Capital Resources discussion below.
IVIAT and CMAT are technologies we licensed from iviGene
Corporation, a company related to us by common ownership. These
technologies enable 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. This licensed technology offers 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 and tuberculosis, as well as agricultural and other non-human uses.
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 strategy is to develop novel technologies through
human proof-of-concept studies (Phase I or II clinical trials) prior to
partnering with major pharmaceutical, biotechnology or health care product firms
for advanced clinical development and commercialization. Upon successful
completion of proof-of-concept studies, we intend to consider sublicensing our
licensed, patented technologies to one or more strategic partners that would be
responsible for advanced clinical development, completing the U.S. Food and Drug
Administration's approval process, and manufacturing and marketing our products.
In order to accomplish these objectives, we must take the following actions:
Replacement Therapy
1. Successfully complete Phase I clinical trials.
2. Obtain FDA approval for a pivotal trial.
Probiotic Technology
1. Develop appropriate manufacturing and packaging systems.
2. Complete one human study.
Mutacin 1140
1. Complete preclinical studies, including animal toxicity and
efficacy, required for an investigational new drug application
submission.
2. Submit an investigational new drug application to the FDA.
11
The above actions, individually and in the aggregate, are expected to be
costly and will require additional capital to undertake and complete. To the
extent our current capital limits our ability to pursue our technologies under
development, we expect our progress to be limited in the near-term to focus on
Replacement Therapy. See Liquidity and Capital Resources below. We currently
believe, providing funding is obtained, that we will be able to begin to
generate ongoing revenue from our development efforts with our oral probiotics
technology sometime in the next eighteen to twenty-four months. This time period
could change depending on the progress of our development efforts and our
ability to negotiate a partnering arrangement, as well as our efforts to raise
additional capital.
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.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States 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 any significant estimates that would have a material impact on our
results of operations or financial condition.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment ("Statement 123(R)"),
a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Statement
123(R), which we expect to adopt in the first quarter of 2006, is generally
similar to Statement 123, however, it will require all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. Thus, pro forma disclosure will
no longer be an alternative to financial statement recognition. We do not
believe the adoption of Statement 123(R) will have a material impact on our
results of operations or financial position.
12
Results of Operations
Three Months Ended March 31, 2005 and 2004
We had no revenues in the three months ended March 31, 2005 and 2004. Our
operating expenses increased 61% to $879,105 in the three months ended March 31,
2005 from $544,461 in the same period in 2004. Research and development expenses
increased 147% to $647,186 in the three months ended March 31, 2005 from
$262,295 in the same period in 2004, reflecting the hiring of additional
research staff amounting to approximately $93,000, contract manufacturing and
conduct of the replacement therapy clinical trials totaling approximately
$212,000, use of consultants costing approximately $40,000 on our mutacin 1140
and probiotic technologies, increased depreciation for new equipment purchased
amounting to approximately $39,000, increased costs for supplies of
approximately $30,000 as a result of the increase in our research staff and
increased costs to operate our new facilities amounting to approximately
$22,000, minimum royalty payments for our technologies of $25,000, less a
reduction in expenses in connection with compensation expense for options
approximating $76,000 caused by a significantly lower stock price in 2005.
General and administration expenses decreased 18% to $231,919 in the three
months ended March 31, 2005 from $282,166 in the same period in 2004, reflecting
the reduction in expenses in connection with compensation expense for options
approximating $127,000 caused by a significantly lower stock price in 2005,
offset by increased costs for additional personnel amounting to approximately
$35,000, for financial audit services approximating $28,000, and for directors'
and officers' liability insurance coverage approximating $14,000.
Interest income increased 108% to $14,620 in the three months ended March
31, 2005 from $7,021 during the same period in 2004, reflecting the higher
average cash balances maintained during most of the quarterly period in 2005, as
well as higher interest rates in 2005. We incurred interest expense of $1,645 in
the three months ended March 31, 2005 as result of the initial draw on a note
payable to our bank of approximately $229,500 on February 24, 2005. There was no
interest expense in the same period in 2004 as we had no outstanding debt that
incurred interest charges.
We incurred net losses of $866,130 and $537,440 during the three months
ended March 31, 2005 and 2004, respectively. The increase in our net loss
amounting to $328,690 was principally caused by our hiring additional personnel
and the increase in costs associated with supporting those employees, the costs
to support our clinical trial for our replacement therapy technology and the
increase in consulting fees to support our other research efforts.
Liquidity and Capital Resources
Our operating activities used cash of $1,282,635 for the three months
ended March 31, 2005 and $545,132 for the three months ended March 31, 2004. Our
working capital was $2,119,999 as of March 31, 2005. Cash used by operations in
the three months ended March 31, 2005 resulted primarily from our net loss from
operations of $866,130, as well as an increase in prepaid expenses of
approximately $100,000, a decrease in accounts payable and accrued expenses of
approximately $152,000, and adjustments for non-cash expenses for depreciation
of approximately $49,000 and non-cash reversal of expenses for stock-based
compensation of approximately $213,000.
Our investing activities used cash of $561,462 for the three months ended
March 31, 2005 for the acquisition of property and equipment. We anticipate
13
spending less than $150,000 on additional property and equipment during the
remainder of 2005.
Our financing activities provided $559,236 in cash for the three months
ended March 31, 2005, which consists primarily of $556,361 in proceeds from a
note payable to our bank. On February 24, 2005, we entered into a Business Loan
Agreement with our bank that will fund approximately $615,000 of laboratory
equipment purchases. The loan has a term of 37 months with the first month's
payment of interest only and the remaining monthly payments of principal and
interest of approximately $18,900 per month. Interest will be calculated at the
prime rate as published in the Wall Street Journal (5.75% at March 31, 2005)
plus 1.00%. Interest can never be below 5.75% or above 17.5%. The loan is
collateralized by the equipment being purchased as well as all equipment
currently owned by the Company and the agreement requires the Company to
maintain working capital of $750,000. It is anticipated that the Company will
draw $59,000 in additional proceeds under the terms of this loan in the second
quarter of 2005.
We anticipate that direct costs in 2005 associated with preparing for and
conducting clinical testing on our replacement therapy technology will be
approximately $1,700,000, of which $330,000 was spent in the three months ended
March 31, 2005. During the remainder of 2005, provided additional financing is
obtained, we expect to spend approximately $670,000 for manufacturing clinical
materials, $410,000 for conducting the clinical trials and $290,000 for employee
salaries, fringe benefits, supplies and other related direct costs. Provided
additional financing is obtained, we would also anticipate spending during the
remainder of 2005 approximately $434,000 for performing animal studies on our
mutacin 1140 technology. Such costs are expected to consist of approximately
$165,000 for contract research, $135,000 for employee salaries and fringe
benefits and $134,000 for laboratory supplies and other related direct costs.
Our business is based on commercializing entirely new and unique
technologies, and our current business plan contains a variety of assumptions
and expectations that are subject to uncertainty, including assumptions and
expectations about manufacturing capabilities, clinical testing cost and
pricing, continuing technological improvements, strategic licensing
relationships and other relevant matters. These assumptions take into account
recent financings, as well as expected but currently unidentified additional
financings. We have experienced losses from continuing operations during the
last two fiscal years and have an accumulated deficit of $6,338,114 as of March
31, 2005. Cash used in continuing operations for 2004 was $2,745,243 and for the
first three months of 2005 was $1,282,635. At March 31, 2005, our principal
source of liquidity was $2,381,383 of cash and cash equivalents. These operating
results occurred while developing and attempting to commercialize and
manufacture products from entirely new and unique technologies. Our business
plan requires significant spending related primarily to clinical testing
expenditures. These factors place a significant strain on our limited financial
resources and adversely affect our ability to continue as a going concern. Our
ultimate success depends on our ability to continue to raise capital for our
operations.
Our capital requirements during the remainder of 2005 will depend on
numerous factors, including the success of our research and development, the
resources we devote to develop and support our technologies, and the success of
pursuing strategic licensing and funded product development relationships with
external partners. We expect to incur substantial expenditures to further
develop each of our technologies including continued increases in personnel and
costs related to research, preclinical testing and clinical studies, as well as
significant costs associated with being a public company. We believe our working
capital at March 31, 2005 is not sufficient to meet our business objectives as
14
presently structured. 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. We recognize that we must generate additional
capital resources to enable us to continue as a going concern. Our plans include
seeking financing, alliances or other partnership agreements with entities
interested in our technologies, or other business transactions that would
generate sufficient resources to assure continuation of our operations and
research and development programs.
In February 2005, we entered into an agreement with an investment advisory
firm to assist us in raising additional capital by acting as a financial advisor
and placement agent. We continue to work with the investment advisory firm
toward that goal. There can be no assurance that additional financing will be
available to us on acceptable terms, or at all. Our future success depends on
our ability to raise capital and ultimately generate revenue and attain
profitability. We cannot be certain that additional capital, whether through
selling additional debt or equity securities or obtaining a line of credit or
other loan, will be available to us or, if available, will be on terms
acceptable to us. If we issue additional securities to raise funds, these
securities may have rights, preferences, or privileges senior to those of our
common stock, and our current stockholders may experience substantial dilution.
To date, we have not obtained financing sufficient to support our plans
going forward. Until such time as additional financing for our operations is
obtained, we must substantially curtail our spending and preserve our remaining
cash. Accordingly, we have taken immediate steps to significantly reduce our
operating costs including, but not limited to, curtailing new hires, limiting
the use of outside consultants and reducing other operating costs. These cost
restraints may cause a delay in some of our development plans, however, we will
seek to focus on our Replacement Therapy technology and the completion of Phase
I clinical trials. As a result of these limits on spending, we currently believe
we will have sufficient cash resources to continue operations through the end of
2005. Thereafter, without sufficient capital to fund our operations, we will be
unable to continue as a going concern and will have to cease operations.
15
Risk Factors Affecting Our Business
You should carefully consider the risks described below before making an
investment decision in our securities. These risk factors are effective as of
the date of this Form 10-QSB and shall be deemed to be modified or superseded to
the extent that a statement contained in our future filings incorporated herein
by reference modifies or replaces such statement. All of these risks may impair
our business operations. The forward-looking statements in this Form 10-QSB and
in the documents incorporated herein by reference involve risks and
uncertainties and actual results may differ materially from the results we
discuss in the forward-looking statements. If any of the following risks
actually occur, our business, financial condition or results of operations could
be materially adversely affected. In that case, the trading price of our stock
could decline, and you may lose all or part of your investment.
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. Our independent registered certified public accountants have
expressed substantial doubt as to our ability to continue as a going concern. We
must continue to raise money from investors and seek partners and/or
sub-licensors with whom to collaborate in 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 $6,331,000 through March 31, 2005. Since
inception, we have substantially funded our operations from the public and
private sales of our securities. 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. At
March 31, 2005 we had approximately $2,120,000 in available working capital and
our budgeted expenditures for the remainder of 2005 currently exceed our
available working capital. Accordingly, we have taken steps to substantially
reduce our operating expenditures which will negatively impact our anticipated
plans and development efforts going forward. We believe, absent any additional
funds and considering the impact of our cost reduction plans, our existing cash
will be sufficient to enable us to continue in operation through December 2005.
Thereafter, without additional funding, we anticipate that we will need to
discontinue our operations. There is no assurance that additional capital will
be available to us or, if available, will be on terms acceptable to us. To the
extent we have not been able to raise additional capital to date, the actions we
are taking to reduce our costs of operations, may adversely impact future
operations, employee morale, business relations and other aspects of our
business. In addition, because adequate funds are not available to us, we will
delay, scale back or eliminate the development of one or more of our products
which would be harmful to 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. If we are unable to raise additional capital, we will be
unable to continue as a going concern and will
16
have to cease operations.
We must spend at least $1 million annually on development of our replacement
therapy and Mutacin 1140 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 these
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
terms of the licenses, we must spend at least $1 million per year 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 these 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 and Mutacin 1140
technologies will become valueless and we may have to cease operations.
If we are unable to maintain regulatory clearance or obtain approval for our
technologies, we will be unable to generate revenues and may have to cease
operations.
Only our replacement therapy technology has been granted clearance to
begin Phase 1 human clinical trials by the FDA. Clinical trials on our
replacement therapy are expected to take 4-5 years to fully complete. Our other
technologies have not been cleared for testing in humans. Our technologies have
not been cleared for marketing by the FDA or foreign regulatory authorities and
they will not be able to be commercially distributed in the United States or any
international markets until such clearances are 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 technologies may be found to
be unsafe or ineffective or otherwise fail to satisfy regulatory requirements.
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
maintain regulatory clearance for our replacement therapy or fail to obtain FDA
clearance for our other technologies, we may have to cease operations.
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.
All of our 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
17
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
may 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 are 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 may 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 manufacture 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, and there can be no
assurance that we will be able to generate adequate revenue from operations.
We rely on the significant experience and specialized expertise of our senior
management and must retain and attract qualified scientists and other highly
skilled personnel in a highly competitive job environment to maintain and grow
our business.
Our performance is substantially dependent on the continued services and
on the performance of our senior management and our team of research scientists,
who have many years of experience and specialized expertise in our business. Our
performance also depends on our ability to retain and motivate our other
executive officers and key employees. The loss of the services of our Chief
Executive Officer, Mento A. Soponis and our Chief Scientific Officer, Dr.
Jeffrey D. Hillman, and any of our other executive officers or of our
researchers could harm our ability to develop and commercialize our
technologies. We have no "key man" life insurance policies. We have three year
employment agreements with Mr. Soponis and Dr. Hillman, which automatically
renew for one-year terms unless 90 days written notice is given by either party.
Our future success also depends on our ability to identify, attract, hire,
train, retain and motivate highly skilled technical, managerial and research
personnel. If we fail to attract, integrate and retain the necessary personnel,
our ability to maintain and build our business could suffer significantly.
It is possible that our replacement therapy and oral probiotic technologies will
be less effective in humans than they have been shown to be in animals. It is
possible our Mutacin 1140 technology will be shown to be ineffective or harmful
in humans. If any 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 Streptococcus mutans ("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
18
this technology. To date the testing of our oral probiotic technology has been
undertaken solely in animals. Those studies have shown our technology to be
effective at helping to reduce certain bacteria that are believed to cause
periodontal disease. It is possible that our probiotic technology will not be
effective in reducing those bacteria and will not improve periodontal health. If
our oral probiotic technology is shown to be ineffective or harmful to humans,
we will be unable to commercialize it and generate revenues from sales. To date
the testing of the 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 these studies are conducted, 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
our technologies, 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 clinical trials that are required in order to obtain FDA permission to sell
it, we will be unable to generate revenues from product sales, 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 March 2005 we successfully developed a methodology for
manufacturing Mutacin 1140 in quantities sufficient to undertake the preclinical
studies necessary to prepare an Investigational New Drug application to the FDA.
We believe we will be able to optimize this methodology to allow large-scale
commercial production of the antibiotic. However, this methodology may not be
feasible for large-scale manufacture of the mutacin 1140 antibiotic. If we are
not able to optimize this methodology, we will be unable to generate revenues
from this technology and we may have to cease operations.
If clinical trials for our product candidates are unsuccessful or delayed, we
will be unable to meet our anticipated development and commercialization
timelines, which could cause our stock price to decline and we may have to cease
operations.
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. 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.
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 and may cause us to cease operations.
19
We intend to consider relying on third parties to pay the majority of costs
relating to 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 the costs ourselves. We may be unable
to do so, and if we are not, we may have to cease operations.
We intend to consider sublicensing our technologies to strategic partners
prior to commercialization. If we do so, our sublicensees will pay the costs of
any remaining clinical trials, and manufacturing and marketing of 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 cannot obtain financing, 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
20
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.
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. Our management 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 products which may be developed from our
technologies 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 technologies we are developing
must undergo rigorous preclinical and clinical testing and an extensive
regulatory approval process before they can be
21
marketed. This process makes it longer, harder and more costly to bring products
which may be developed from our technologies to market, and we cannot guarantee
that any of such 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
technologies 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 United States. In the
United States 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 products based on our licensed, patented
technologies for broader or different applications or to market updated products
that represent extensions of our basic technologies. In addition, we may not
receive FDA approval to export our products based on our licensed, patented
technologies 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.
From time to time, legislative or regulatory proposals are introduced that
could alter the review and approval process relating to our technologies. 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 technologies could
make it more difficult and costly to obtain approval for new products based on
our technologies, 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, oral probiotics and
Mutacin 1140 technologies 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
22
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 based on 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
$2,000,000 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, it could limit our revenue.
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 are unable to obtain favorable third party reimbursement and patients are
unwilling or unable to pay for our products out-of-pocket, it could limit our
revenue and harm our business.
Our stock price historically has been volatile and our stock's trading volume
has been low.
Although our common stock began trading on the American Stock Exchange
under the symbol "ONI" in May, 2004, 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;
23
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 escrow 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 31,
2005 our stock price has fluctuated from $4.50 to $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 31, 2005, there were 14,597,224 shares of our common stock outstanding,
with another 273,880 shares of common stock issuable upon exercise of our
underwriter warrants, 935,000 shares issuable upon exercise of options issued
and an additional 565,000 shares available for issuance under our stock option
plans. The issuance of our stock underlying these options is covered by an S-8
registration statement we filed with the SEC and may be resold into the market.
We had approximately 3,960,317 shares of 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 3,690,344 are
held by principals of the Company and 269,973 are held by the University of
Florida Research Foundation, Inc. Through March 31, 2005, approximately
4,510,421 shares held by principals (including a former director) and 329,967
shares held by the University of Florida Research Foundation, Inc. were released
24
from escrow. The released shares held by the principals (excluding the former
director) may now be resold into the market under Rule 144. This could cause the
market price of our common stock to drop significantly. The shares held by the
University of Florida Research Foundation, Inc. are eligible for resale without
restriction.
We may be unable to maintain the listing of our common stock on the American
Stock Exchange and that would make it more difficult for shareholders to dispose
of their common stock.
Our common stock is listed on the American Stock Exchange. We cannot
guarantee that it will always be listed. The American Stock Exchange 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 de-listed from the American Stock Exchange, trading
in our common stock would be conducted, if at all, on the NASD's OTC Bulletin
Board in the United States. This would make it more difficult for shareholders
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.
We must maintain a current prospectus and registration statement in connection
with shares and warrants issued in connection with our private placement.
We may need to meet state registration requirements for sales of
securities in states where an exemption from registration is not otherwise
available. There are currently 273,880 shares of common stock issuable upon
exercise of the underwriter warrants at $1.25 per share that were issued in
connection with our initial public offering and expire on June 24, 2005. In
addition, there are 162,500 shares of common stock issuable upon exercise of
warrants issued in connection with our private placement, 25,000 at an exercise
price of $2.75 and 137,500 at an exercise price of $3.50 expiring November 30,
2008. We are obligated to maintain an effective registration statement in
connection with the resale of shares issued and acquired upon exercise of
warrants issued in connection with our private placement. It is possible that we
may be unable to cause a registration statement covering the common stock
underlying these shares and shares issuable upon exercise of the warrants to be
effective or to maintain the effectiveness of such registration. There can be no
assurance that we will be able to maintain an effective registration statement
relating to the resale of our common stock. If we are unable to maintain an
effective registration for the resale of common stock issued in connection with
our private placement and upon exercise of the warrants, we may be subject to
claims by the holders of such shares and warrants.
We have limited resources which exposes us to potential risks resulting from new
internal control requirements under Section 404 of the Sarbanes-Oxley Act of
2002.
We are evaluating our internal controls in order to allow management to
report on, and our independent registered certified public accounting firm to
attest to, our internal controls, as required by Section 404 of the
Sarbanes-Oxley Act of 2002. We may encounter unexpected delays in implementing
the requirements relating to internal controls, therefore, we cannot be certain
about the timing of completion of our evaluation, testing and remediation
actions or the impact that these activities will have on our operations since
there is no precedent available by which to measure the adequacy of our
compliance. We also expect to incur additional expenses and diversion of
management's time as a result of performing the system and process evaluation,
testing and remediation required in order to comply with the management
certification and auditor attestation requirements. We are a small company with
25
limited resources that will make it difficult for us to timely comply with the
requirements of Section 404. If we are not able to timely comply with the
requirements set forth in Section 404, we might be subject to sanctions or
investigation by regulatory authorities. Any such action could adversely affect
our business and financial results. The requirement to comply with Section 404
of the Sarbanes-Oxley Act of 2002 will become effective for our fiscal year
ending December 31, 2006.
In addition, in our system of internal controls we may rely on the
internal controls of third parties such as payroll service providers. In our
evaluation of our internal controls, we will consider the implication of our
reliance on the internal controls of third parties. Until we have completed our
evaluation, we are unable to determine the extent of our reliance on those
controls, the extent and nature of the testing of those controls, and
remediation actions necessary where that reliance cannot be adequately evaluated
and tested.
Forward-Looking Statements
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
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; and (vi) our expectation with
respect to generating near-term revenue from our oral probiotic technology.
These statements are not guarantees of future performance and are subject to a
number of known and unknown risks, uncertainties, and other factors, including
those discussed above and elsewhere in this report and those set forth under
"Risk Factors Affecting Our Business" in our 2004 Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission, that could cause actual
results to differ materially from future results, performances, or achievements
expressed or implied by such forward-looking statements. Consequently, undue
reliance should not be placed on these forward-looking statements. Although we
believe our expectations are based on reasonable assumptions, we can give no
assurance that the anticipated results will occur. We undertake no obligation to
update publicly any 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
26
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; (v) our
inability to successfully partner with manufacturers and distributors with
respect to our oral probiotic technology; and (vi) other factors including those
identified in our filings from time to time with the SEC.
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ITEM 3. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We have established and are currently maintaining disclosure controls and
procedures for our Company designed to ensure that information required to be
disclosed in our filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the required time periods specified in
the SEC's rules and forms. Our Chief Executive Officer and Chief Financial
Officer conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures and have concluded that our disclosure controls and
procedures are effective as of the end of the period covered by this report.
Changes in Internal Controls
We have also evaluated our internal controls over financial reporting, and
there have been no changes in our internal controls over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES.
a. None
b. None
c. None
d. Note 2 of the Financial Statements included in Part I of this filing
of Form 10-QSB as to use of proceeds through March 31, 2005 is
hereby incorporated by reference.
e. None
ITEM 6. EXHIBITS
Exhibits Item Description
10.47 Business Loan Agreement, Collateral Security Agreement and
Promissory Note between the Company and Merchants & Southern
Bank dated February 24, 2005
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14 and Rule 15d-14(a), promulgated under the Securities
and Exchange Act of 1934, as amended.
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14 and Rule 15d-14(a), promulgated under the Securities
and Exchange Act of 1934, as amended.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer).
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer).
29
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on this 13th day of May, 2005.
ORAGENICS, INC.
BY: /s/ Mento A. Soponis
Mento A. Soponis, President and Principal
Executive Officer
BY: /s/ Paul A. Hassie
Paul A. Hassie, Secretary, Treasurer, Principal
Accounting Officer and Principal Financial Officer
30