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, 2005
[ ] 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.
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(Name of small business issuer in its charter)
Florida 59-3410522
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
13700 Progess Blvd., Alachua, Florida 32615
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(Address of Principal Executive Offices) (Zip Code)
(386) 418-4018
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value $.001 per share
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 registrant had no revenues for the fiscal year ended December 31, 2005.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 6, 2006 was approximately $5,465,756 based upon a
last sales price of $0.48 as reported by the American Stock Exchange.
As of March 6, 2006 there were 19,646,117 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement for its 2006
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.............................................18
Item 3. Legal Proceedings...................................................18
Item 4. Submission of Matters to a Vote of Security Holders.................18
PART II
Item 5. Market for Common Equity and Related Stockholder Matters............19
Item 6. Management's Discussion and Analysis or Plan of Operation...........22
Item 7. Financial Statements................................................42
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................42
Item 8A Controls and Procedures.............................................42
Item 8B Other Information...................................................43
PART III
Item 9. Directors and Executive Officers of the Registrant..................44
Item 10. Executive Compensation..............................................44
Item 11. Security Ownership of Certain Beneficial Owners and Management......44
Item 12. Certain Relationships and Related Transactions......................44
Item 13. Exhibits and Reports on Form 8-K....................................44
Item 14. Principal Accountant Fees and Services..............................44
Signatures....................................................................64
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PART I
Item 1. Description of Business.
This description contains certain forward-looking statements that involve
risks and uncertainties. Our 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. We assume no
obligation to update any forward-looking statements contained herein.
Overview
We are an 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, as well as discovered internally. Our
strategy is to in-license or internally discover and to develop products through
human proof-of-concept studies (Phase II clinical trials of the U.S. Food and
Drug Administration's ("FDA") 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, however, we have not generated revenues from
sales of products.
We hope to be in a position to continue to develop several products, each
of which addresses 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 (s. 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 Phase III
clinical trials. To facilitate further patient recruitment in our Phase I
clinical trial, we opened an additional clinical site in June 2005,
however, we have had very limited patient enrollment through December 31,
2005 due to the rigorous requirements for enrollment imposed upon us by the
FDA. In January 2006, we concluded this study and discussed with the FDA
our problems with patient enrollment and how we could modify our protocol
to allow us to move forward in our clinical trials. A formal re-submission
of an amended protocol is expected to be filed with the FDA in March 2006
and we anticipate instituting a second Phase I clinical study by the end of
the second quarter of 2006. We remain committed to complete the human
safety study of replacement therapy to the satisfaction of the FDA and we
expect the cost in 2006 will be approximately $350,000.
Mutacin 1140 is a highly potent bactericidal peptide that is
produced by our strain of Streptococcus mutans. Our proprietary mutacin was
discovered by our researchers during the course of developing replacement
therapy and is a novel antibiotic that has broad-spectrum antimicrobial
activity against essentially all Gram-positive bacteria including
vancomycin-resistant Staphylococcus aureus. The antibiotic currently is in
preclinical stages of development. During the second quarter of 2005, we
completed development of a proprietary manufacturing process for mutacin
1140, which overcame a previous hurdle to that molecule's development. We
are now able to manufacture in sufficient quantities to allow us to conduct
preclinical studies needed to enable the filing of an Investigational New
Drug (IND) application. If we are able to secure adequate funding, we plan
to continue to perform in vitro antimicrobial susceptibility and toxicity
testing during the first half of 2006 before performing more detailed
animal safety and efficacy studies using mutacin 1140. For example, in
March and April 2006 we plan to conduct two preclinical studies with MU
1140(TM) (which is mutacin 1140), utilizing independent testing labs, that
will provide information on Tier 2 spectrum of activity against clinically
important Gram-positive bacteria and the effectiveness in a drug resistant
Staphylococcus aureus infected animal model system. Upon adequate funding
and successful completion of this testing and the animal studies we expect
to be positioned to file an IND in the fourth quarter of 2006.
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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 a cosmetic or as "health supplements" in certain geographic
areas without the need for extensive regulatory oversight, we believe that
with adequate funding, we may achieve commercialization of our probiotic
product in these markets by late 2006. We are continuing our efforts to
seek partners in Europe and Asia for market opportunities for our oral
probiotic technology. European and Asian companies have signaled their
intent to establish a licensing agreement with us, while another potential
partner is completing a laboratory evaluation of the product before moving
forward with possible licensing discussions. We expect to initiate a human
trial within the next two months to support product claims for Probiora
3(TM). While there can be no assurances, this study should be completed by
early in the third quarter of 2006. If successfully developed, our oral
rinse product will be one of the first probiotics to be marketed for the
maintenance of oral health.
IVIAT and CMAT are technologies we licensed from iviGene
Corporation. Two of our directors own an aggregate 19.1% interest in
iviGene Corporation. 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. These
licensed technologies offer 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.
We were founded in 1996, became operational in 1999 and currently employ
10 full-time employees. Our registered office is located at 532 SW 117th Street,
Gainesville, FL 32607, and our headquarters are located at 13700 Progress
Boulevard, Alachua, Florida 32615.
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 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 obtain additional capital and
take the following actions:
Replacement Therapy
1. Initiate second Phase I safety trial.
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.
Probiotic Technology
1. Develop appropriate manufacturing and packaging systems.
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2. Complete one human study.
The above actions, individually and in the aggregate, are expected to be
costly to undertake and complete and will require additional capital over and
above what we currently have available to us. Our current available capital
limits our ability to fully develop our technologies. We expect to allocate our
limited capital resources to the development of our technologies while we
continue to explore additional capital raising opportunities. There can be no
assurances that such additional capital will be available to us. The time period
for the development of our technologies could change depending on the progress
of our ability to negotiate a partnering arrangement, as well as our efforts to
raise additional capital.
Our Technologies
Replacement Therapy
Dental caries (tooth decay) is a worldwide epidemic that affects the
majority of populations in industrialized and developing countries. According to
the World Health Organization, tooth decay is the most prevalent infectious
disease, affecting approximately 5 billion people. Much of the tooth decay in
low-income countries remains untreated until the teeth are extracted.
Tooth decay is characterized by the dissolution of enamel and dentin which
eventually results in the destruction of the entire tooth. The immediate cause
of tooth decay is organic acid produced by microorganisms on the tooth surface.
Studies suggest that of the 400 to 500 microbial species in the mouth,
Streptococcus mutans, a common bacterium found in virtually all humans, is the
principal causative agent in the development of tooth decay. Residing within
dental plaque, Streptococcus mutans derives its energy from carbohydrate
metabolism as it converts dietary sugar to lactic acid which, in turn, erodes
the tooth enamel.
Our replacement therapy technology employs a genetically modified strain
of Streptococcus mutans that does not produce lactic acid. When applied to the
teeth, this non acid-producing organism displaces and permanently replaces the
indigenous acid-producing strains of Streptococcus mutans, thereby potentially
providing lifelong protection against most forms of tooth decay.
Replacement therapy is suitable for use by the general population. The
ideal application would be to treat infants at the onset of tooth eruption when
initial bacterial colonization of the tooth surfaces is occurring. Replacement
therapy requires only a single 5-minute application. Applied topically to the
teeth with a swab, the therapy can be administered by dentists to patients
during routine office visits.
We submitted an IND for replacement therapy to the FDA in 1998 seeking
permission to begin Phase I clinical trials. In March 2003, we submitted a new
IND. In November 2004, the FDA approved our clinical design and protocol for the
Phase I clinical trial. In March 2005, we initiated enrollment in the clinical
trial. We are in the process of seeking permission to modify the design and
protocol of our Phase I clinical trial with the FDA due to patient enrollment
difficulties discussed below under regulatory status.
Technical Background
Replacement therapy represents a novel approach to preventing bacterial
infections by capitalizing on interactions between different species of bacteria
inhabiting the same ecosystem. This approach involves permanently implanting a
harmless strain of bacteria in the host's microflora. Once established, the
harmless strain prevents the colonization and outgrowth of a potential pathogen.
In the case of dental caries, beneficial bacteria are implanted in the mouth of
the host to prevent colonization of the harmful bacteria that cause tooth decay.
Our replacement therapy involves replacing the naturally occurring,
acid-producing strains of Streptococcus mutans with a genetically engineered
strain of Streptococcus mutans that does not produce lactic acid. Our
researchers discovered a strain of Streptococcus mutans that did not produce the
decay-causing lactic acid. This strain, however, could not permanently replace
the acid-producing strains of Streptococcus mutans naturally occurring in the
normal flora of the mouth. Thus, it was first necessary to find a strain of
Streptococcus mutans that could permanently replace the naturally occurring
decay-causing strains of Streptococcus mutans.
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Through extensive scientific research, we eventually found a rare strain
of Streptococcus mutans, present in only 1% of the population, which secretes a
natural antibiotic capable of killing virtually all other strains of
Streptococcus mutans. We believe this natural antibiotic, referred to as mutacin
1140, enables the bacteria to persistently and preemptively colonize the oral
cavity, displace pre-existing strains and gain dominance in its ecosystem,
dental plaque.
Using clinical isolates of this rare strain as the starting strain, we
then employed recombinant DNA technology to delete the gene encoding for lactate
dehydrogenase. Our research revealed the gene deletion eliminated the strain's
ability to produce lactic acid; however, it also caused a metabolic imbalance
that prevented the strain from growing. So as to correct the imbalance, an
auxiliary gene for alcohol dehydrogenase was inserted which restored the
strain's growth. Instead of lactic acid, the strain produced ethanol and acetoin
which are the normal end products of metabolism in many other microorganisms
colonizing the oral cavity. We named this strain BCS3-L1, and filed for
composition of matter intellectual property protection for the strain.
Regulatory Status
We submitted an Investigational New Drug application for our replacement
therapy to the U.S. Food and Drug Administration in 1998 seeking permission to
begin clinical trials. Subsequent to review by the Office of Vaccines Research
and Review Division of Vaccines and Related Products Application at the Center
for Biologics Evaluation and Research (CBER), the FDA placed the application on
clinical hold pending the development of a recall mechanism to completely
eradicate the organism from human subjects, should it be necessary, until
complete safety could be experimentally established in the Phase I clinical
trials.
In response to this requirement, we genetically engineered a second strain
of Streptococcus mutans (A2JM) identical in every aspect to the original strain
(BCS3-L1) except that it requires exogenous D-alanine for survival. d-alanine
was selected because the nutrient is not normally found in human diets; humans
do not produce it; and it can be easily administered via a mouth rinse. With
D-alanine nutrient supplementation, the organism lives; without nutrient
supplementation, the organism cannot survive. Therefore, the organism can be
completely eradicated from human subjects by withdrawing D-alanine nutrient
supplementation.
In the initial studies to assess product safety (Phase I clinical trials)
that began in March 2005, the genetically altered strain of Streptococcus mutans
requiring D-alanine supplementation was administered to study subjects in
conjunction with a twice daily dose of a D-alanine mouth rinse. Once safety is
experimentally established, the replacement therapy to be commercialized will
consist of the original effector strain which does not require D-alanine to
maintain colonization.
We began our initial study in May 2005, however, during the remainder of
2005 we were unable to enroll a sufficient number of qualified subjects into our
study. This initial study was expected to be conducted in eleven couples and an
additional four unattached males at Hill Top Research in West Palm Beach,
Florida and would look at the safety of Replacement Therapy and the potential
for horizontal transmission of the Replacement Therapy organism to the
non-treated member of each couple. All of the participants in the trial,
according to the FDA approved protocol, were required to be without teeth, with
full sets of dentures, and under the age of 55. The study required four days of
pretreatment with an antibiotic (chlorhexidine) to kill resident S. mutans in
each participant's mouth. Male study subjects were to receive Replacement
Therapy. The non-treated member of each couple was to be tested repeatedly to
see if there was any horizontal transmission of the Replacement Therapy organism
from one person to another. The investigators were to determine the genetic
stability of the Replacement Therapy organism over time. Seven days after
treatment, the subjects were to undergo an eradication phase of the study for
one month, using the same antibiotic and the withholding of a D-alanine amino
acid supplement that the Replacement Therapy organism requires for its survival.
Finally, the protocol required investigators to subsequently follow each study
participant for three months to ensure that the eradication was effective.
On December 2, 2005, due to the enrollment of only one subject in our
initial clinical study, we re-submitted a new protocol to the FDA that was less
restrictive. In January 2006, we held discussions with the FDA about our
problems with patient enrollment and how we could modify our protocol. The
critical changes to the study are that it will be conducted in 10 patients who
have teeth and the patients will be quarantined to a hospital-type setting for
up to 12 days with a 2 month follow-up phase. We have concluded the initial
study and expect to submit additional proposed changes in the trial to the FDA
in March 2006. We anticipate instituting a second Phase I clinical study by the
third quarter of 2006. We believe these changes, if approved in a timely manner
by the FDA, will allow the Company to complete the enrollment of patients and
thereby complete the study by the end of 2006.
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Preclinical Studies
From 1976 to 2002, our researchers and others have conducted several
animal studies on replacement therapy for dental caries. We believe these
studies support our belief in the ability of our novel technology to prevent
tooth decay. Additionally, we believe these studies demonstrate the ability of
our genetically engineered strain of Streptococcus mutans to persistently and
preemptively colonize the oral cavity and aggressively displace the indigenous
wild-type strain, filling its bacterial niche in all respects except for the
production of lactic acid.
In the most recent animal study, our patented effector strain (BCS3-L1)
and the wild-type strain were both grown in culture in the presence of sugar.
The wild-type strain produced mostly lactic acid from the metabolism of sugar;
it also produced small amounts of other acids as well as the non-acidic
compounds, ethanol and acetoin. By contrast, our genetically modified strain
produced mostly the non-acidic compounds, ethanol and acetoin, from the
metabolism of sugar. No lactic acid was detectable. Two identical groups of
conventional rats were then infected with either the wild-type strain or the
genetically modified strain. A third identical group was not infected and served
as the control group.
In both preemptive colonization and aggressive displacement rat model
studies, the genetically engineered effector strain performed well and was able
to occupy the niche normally occupied by wild-type Streptococcus mutans. The
mutacin 1140 produced by the effector strain appeared to provide a selective
advantage in colonization suitable for use in replacement therapy for dental
caries.
A six-month study was also conducted to evaluate possible toxic effects of
exposure to the genetically modified effector strain. No adverse gross or
histological side effects were observed in conventional rats. Sufficient amounts
of mutacin 1140 have not yet been purified to be able to directly test its
toxicity but it belongs to the same class of antibiotics as nisin, which has
very low toxicity and is used as a food preservative worldwide.
In summary, we believe the preclinical studies demonstrate that our
genetically modified strain of Streptococcus mutans:
o Does not cause significant tooth decay in the animal test subjects;
o Persistently and preemptively colonizes the tooth surfaces of the
animal test subjects;
o Displaces other strains of Streptococcus mutans;
o Is genetically stable in the laboratory and in the animal test
subjects;
o Shows no toxicity in acute and chronic tests; and
o Does not disrupt the normal flora of the mouth.
Intellectual Property
We have exclusively licensed the intellectual property for our replacement
therapy from the University of Florida Research Foundation, Inc. The license is
dated August 4, 1998 and was amended on September 15, 2000, July 10, 2002,
September 25, 2002 and March 17, 2003. The agreement provides us with an
exclusive worldwide license to make, use and sell products and processes covered
by Patent No. 5,607,672, which is dated March 4, 1997 and will expire on March
3, 2014. Our license is for the period of the patent, subject to the performance
of terms and conditions contained therein. The patent covers the genetically
altered strain of Streptococcus 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
that we make to the products and processes covered by the patent.
Under the terms of the license, we have entered into an Equity Agreement
with the University of Florida Research Foundation, Inc. under which we issued
599,940 shares of our common stock as partial consideration for the license. We
are obligated to pay 5% of the selling price of any products developed from the
licensed technology to the University of Florida Research Foundation, Inc. and,
if we sublicense the license, we are obligated to pay 20% of all amounts
received from the sublicensee. On December 31, 2005 and each year thereafter we
are obligated to
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make a minimum royalty payment of $50,000 for replacement therapy and $50,000
for mutacin 1140, for an aggregate of $100,000 which is required to be paid in
equal quarterly installments of $25,000. We spent in excess of $1,000,000 in
each of 2005 and 2004 which were the minimum amounts required under our license
in order to maintain it. In each future calendar year and in addition to the
royalty payment obligations, we are obligated to spend, or cause to be spent, an
aggregate of $1,000,000 on the research, development and regulatory prosecution
of our replacement therapy and mutacin 1140 technologies combined, 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 also 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 patent. In 2003, upon our having received
external funding exceeding $1 million, we reimbursed the university $100,000 of
the initial $105,000 they paid for patent prosecution. During 2004 and 2005, we
paid the university an additional $83,000 as reimbursement for patent
prosecutions. 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, for which we
obtained liability insurance in the amount of $2,000,000 that expires in August,
2006. There is no assurance that we can obtain continued coverage on reasonable
terms.
We received notification from B.C. International Corporation on July 29,
2002 that a gene utilized in its licensed, patented strain of Streptococcus
mutans infringes a patent which it holds under a license. B.C. International
Corporation's notification did not state that they intended to pursue legal
remedies. We do not believe that the gene in question infringes that patent and
we sent them correspondence setting out our position. We have received no
further communication from B.C. International Corporation.
Manufacturing, Marketing and Distribution
The manufacturing methods for producing our genetically engineered strain
of Streptococcus mutans are standard fermentation methods. These methods involve
culturing bacteria in large vessels and harvesting them when mature by
centrifuge or filtration. The cells are then suspended in a pharmaceutical
medium appropriate for application in the human mouth. These manufacturing
methods are commonplace and readily available within the pharmaceutical
industry.
Upon successful completion of Phase I clinical trials, we intend to
consider sublicensing our replacement therapy technology to one or more
strategic partners that would be responsible for advanced clinical development
and commercialization including product manufacturing, marketing and
distribution.
Market Opportunity
Despite the introduction of fluorides in public water systems, fluoridated
toothpastes, fluoride treatments in the dental office and dental sealants, tooth
decay still affects the majority of children and adults. There are a number of
factors that are likely to increase the incidence and frequency of tooth decay
which include:
o increasing consumption of dietary sugar;
o increasing consumption of bottled water, which generally does not
contain fluoride; and
o increasing age of the population.
During the last 20 years, sugar consumption has increased. Higher dietary
intake of sugar predisposes individuals to higher rates of tooth decay.
Moreover, according to the Beverage Marketing Corporation, by 2005 consumers
will drink more bottled water than any other alcoholic or non-alcoholic
beverage, with the exception of carbonated soft drinks. Since bottled water
generally does not contain fluoride, the protective effects of fluoridated
public water systems are lost. With the aging of the population, the incidence
and frequency of tooth decay is likely to further increase as most of the baby
boomers upon reaching retirement age will have a relatively intact dentition
unlike previous generations. Teeth lose density with age and become more
susceptible to decay. Therefore, more teeth will be at risk for tooth decay.
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Replacement therapy represents a novel approach to preventing tooth decay.
The technology confers potentially lifelong protection against tooth decay with
one treatment, is suitable for use by the general population and involves
minimal patient education and compliance.
Competition
We are not aware of any direct competitors with respect to our licensed,
patented replacement therapy technology. However, there may be several ways to
disable or eradicate Streptococcus mutans. We know that certain companies and
several academic and research institutions are developing and testing caries
vaccines aimed at eradicating Streptococcus mutans. An alternative approach
involves topical application of adhesion-blocking synthetic peptides that
prevent Streptococcus mutans from attaching to the tooth surface. Products that
result in the elimination of Streptococcus mutans from the natural ecosystem
would require major studies to determine whether such eradication of a naturally
occurring bacteria might not create serious, unintended consequences. The
problem with eradicating Streptococcus mutans is that it disrupts the natural
ecosystem leaving a void for another pathogen potentially more harmful than
Streptococcus mutans to dominate.
Academic institutions, government agencies and other public and private
research organizations may conduct research, seek patent protection and
establish collaborative arrangements for discovery, research and clinical
development of technologies and products that are similar to our replacement
therapy technology. Also many of the 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.
Any product based on our replacement therapy technology will compete
against traditional oral care products used to combat tooth decay. These
products include fluoride-based toothpastes as well as fluoride treatments and
tooth sealants administered by dentists. These competitors could include, among
others, Colgate; Procter & Gamble; Unilever; GlaxoSmithKline; and Dentsply. All
of these companies are much larger and have far greater technical and financial
resources than us.
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Mutacin 1140
Most clinical isolates of Streptococcus mutans secrete peptides, called
mutacins, which exhibit antimicrobial activity against closely related
streptococcal species and other Gram-positive bacteria. Research suggests that
these mutacins play a key role in enabling Streptococcus mutans to effectively
colonize the oral cavity. Two types of mutacins have been characterized at the
molecular level: lantibiotics and non-lantibiotics. 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. In general, lantibiotics have a wider
spectrum of activity than the non-lantibiotic bacteriocins.
Technical Background
Mutacin 1140 was discovered by our researchers in the course of their
research on our core replacement therapy technology; it is the mutacin produced
by our genetically engineered effector strain of Streptococcus mutans. Mutacin
1140 is a lantibiotic, a class of lanthionine-containing antibiotic, which we
believe has the potential to treat a wide variety of infectious diseases.
Extensive in vitro studies we have conducted demonstrate its effectiveness
against all tested Gram-positive bacteria, including such commercially relevant
pathogens as Staphylococcus aureus, Streptococcus pneumoniae, Enterococcus
faecalis and Listeria monocytogenes. To date, our research has not identified
any pathogen resistance to mutacin 1140.
Preclinical Studies
Our researchers and others have conducted laboratory studies on mutacin
1140 to determine its efficacy as an antibacterial agent. To test mutacin 1140's
ability to kill bacteria, standard microbiological testing methods were
employed. Mutacin 1140 was purified and incorporated into growth medium at
different concentrations. The 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 observed to inhibit growth of the test
bacterium, was recorded.
We believe the results of our laboratory studies demonstrate that mutacin
1140 is effective at killing a broad spectrum of bacteria, including the
streptococci that cause pharyngitis ("strep throat"), the predominant type of
pneumonia, and bacterial endocarditis. The antibiotic has also been shown to be
effective against vancomycin-resistant Staphylococcus aureus and Enterococcus
faecalis infections, both of which are rapidly growing problems within the
medical community. Mutacin 1140 was found to kill all Gram-positive bacteria
tested at concentrations comparable to many therapeutically effective
antibiotics. A particularly interesting feature of mutacin 1140 is that none of
the sensitive species of bacteria tested was able to acquire genetically stable
resistance to purified mutacin 1140.
During the next two months, we plan to conduct two preclinical studies
with MU 1140(TM), utilizing independent testing labs, that will provide
information on Tier 2 spectrum of activity against clinically important
Gram-positive bacteria and the effectiveness in a drug resistant Staphylococcus
aureus infected animal model system.
Regulatory Status
Currently, mutacin 1140 is in the early stages of preclinical development
and we have not yet filed an Investigational New Drug application with the FDA,
however, such filing is expected after successful completion of animal studies
that are currently expected to begin in 2006.
Intellectual Property
We have exclusively licensed the intellectual property for our mutacin
1140 technology from the University of Florida Research Foundation, Inc. See the
discussion regarding our license in the Intellectual Property section under our
Replacement Therapy technology.
10
Manufacturing, Marketing and Distribution
Upon successful completion of animal studies, we will file an IND
application for mutacin 1140 with the FDA. Once the FDA has approved an IND and
we have completed Phase I clinical trials, we would expect to seek a strategic
partner for further clinical development and commercialization, including
establishing large-scale manufacturing and production capabilities.
Market Opportunity
The need for novel antibiotics is increasing as a result of the growing
resistance of target pathogens. The Center for Disease Control estimates that
bacteria resistant to known antibiotics cause 44% of hospital infections.
Vancomycin, introduced in 1956, serves as the last line of defense against
certain life-threatening infections. Unfortunately, certain bacteria have
developed strains which resist even vancomycin.
Our antibiotic, mutacin 1140, is a new broad-spectrum antibiotic that has
demonstrated effectiveness against a wide variety of disease-causing bacteria.
Moreover, we believe there is no evidence of pathogen resistance to mutacin
1140. In light of the fact that pathogen resistance has become a major problem
associated with antibiotics in use today, we believe mutacin 1140 offers the
potential to fulfill a significant and increasing medical need for non-resistant
antibiotics.
Competition
Mutacin 1140 competes directly with antibiotic drugs such as vancomycin.
Given the growing resistance of target pathogens to many antibiotics, even
vancomycin, we believe that there is ample room in the marketplace for new
antibiotics. 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 of our competitors are taking approaches to drug development
differing from our approach. These approaches include traditional screening of
natural products, genomics to identify new 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. Commercial success of mutacin 1140 technology will
depend on our ability and the ability of our sublicensees to compete effectively
in all of these areas. There can be no assurance that competitors will not
succeed in developing products that are more effective than mutacin 1140 or
would render mutacin 1140 obsolete and non-competitive.
Any products based on the mutacin 1140 technology will compete against a
large number of prescription antibiotics currently on the market, and against
new antibiotic products that 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. We intend 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 that we will be able to obtain any such
partner. If not, we will be obliged to develop our own channels of distribution
for products based on the mutacin 1140 technology. There can be no assurance
that we will be able to do so.
11
Probiotics
Probiotics are live microorganisms that confer a health benefit to their
host when administered in adequate amounts. In probiotic therapy, beneficial
microorganisms are colonized in areas normally colonized by pathogens. By being
better adapted to their ecosystem than the pathogens, these beneficial bacteria
crowd out harmful bacteria and inhibit colonization and growth of the
disease-causing pathogens. Examples of common probiotic applications are the use
of yogurt containing live cultures to improve digestion, immune system response,
and vaginal and urinary tract health.
The oral cavity provides an ecological niche for 400 -500 bacterial
species, some of which are responsible for periodontal disease (gum disease) and
dental caries (tooth decay). Of all of the bacteria normally residing in a
person's mouth, only about half a dozen are the primary cause of periodontal
disease and dental caries. Our oral rinse probiotics' technology employs three
natural strains of beneficial bacteria which promote oral health and inhibit the
growth of harmful bacteria that cause periodontal disease and tooth decay.
Technical Background
Through our research, we have developed a probiotic product containing
three natural strains of beneficial bacteria that promote oral health. The three
bacterial strains are Streptococcus oralis and Streptococcus uberis for the
maintenance of periodontal health and Streptococcus rattus for the maintenance
of dental health.
Streptococcus oralis and Streptococcus uberis are among several hundred
bacterial species of bacteria that constitute normal dental plaque. These
bacteria, by virtue of their ability to produce hydrogen peroxide, appear to
promote periodontal health by keeping the number of potentially pathogenic
organisms below the threshold level necessary to initiate disease. These
bacteria have demonstrated an ability to inhibit bacteria implicated in
periodontal disease in both laboratory and animal studies. Human studies have
correlated presence of these bacteria with the absence of periodontal pathogens.
Probiotics containing these bacteria applied frequently can provide significant
protection against causative organisms of periodontal disease.
Similarly, we have identified a bacterial strain closely related to
Streptococcus mutans, Streptococcus rattus, which is naturally deficient in its
ability to produce lactic acid. Studies have shown that daily treatment with
this strain results in decreased numbers of Streptococcus mutans, most likely by
competition for essential nutrients or attachment sites on the tooth surfaces.
Daily application of this strain is likely to provide significant protection
against tooth decay.
Preclinical Studies
We believe preclinical studies have demonstrated the ability of our
probiotic to maintain a healthy oral environment. The probiotic creates a
healthful balance of total bacteria by reducing the numbers of bacteria that are
causative agents of periodontal disease and dental caries.
Periodontal disease. We believe research conducted by our scientists 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 disease. Streptococcus oralis and Streptococcus
uberis have been shown in studies to inhibit the growth of disease-causing
bacteria both in laboratory and animal models of infection. Data indicate that
the presence of Streptococcus oralis and Streptococcus uberis provides a good
indication of the health of the periodontium (gums). In healthy periodontal
sites, Streptococcus oralis and Streptococcus uberis are commonly found in
significant amounts while levels of the pathogenic bacteria are usually low. In
diseased periodontal sites, the opposite situation prevails; Streptococcus
oralis and Streptococcus uberis are usually undetectable. When these bacteria
are absent from sites in the periodontium, the sites are much more prone to
disease.
12
Dental caries. We believe probiotics can also be used to suppress levels
of Streptococcus mutans, the principal cause of tooth decay. Streptococcus
mutans converts dietary refined sugar to lactic acid. The lactic acid, in turn,
erodes the mineral in enamel and dentin, which weakens the tooth resulting in
tooth decay. Research conducted by our scientists has led to the discovery of a
close relative of Streptococcus mutans, a strain of Streptococcus rattus, which
is naturally deficient in its ability to produce lactic acid and thus unable to
cause tooth decay. Because Streptococcus rattus is very closely related to
Streptococcus mutans, Streptococcus rattus reduces the number of Streptococcus
mutans by competing for nutrients, attachment sites, and other important
colonization factors. As animal studies have revealed, daily treatment with this
beneficial strain can promote dental health by significantly reducing the
numbers of dental caries-causing Streptococcus mutans.
We are currently performing studies to determine an appropriate and stable
delivery system. We expect to initiate a human trial within the next two months
to support product claims for Probiora 3(TM). While there can be no assurances,
this study should be completed by early in the third quarter of 2006.
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
clinical 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.
In the European Union regulatory approval is not required for commercialization
of the product.
Intellectual Property
In August 2003, we filed a patent application for our probiotic technology
for use in developing oral care products for the maintenance of dental and
periodontal health. We own the patent rights to this technology.
Manufacturing, Marketing and Distribution
Manufacturing methods used to produce probiotic strains are the standard
fermentation methods which involve culturing bacteria in large vessels and
harvesting them when mature by centrifuge or filtration. These methods are
relatively commonplace and readily available within the pharmaceutical industry.
We intend to seek one or more strategic partners for the manufacturing,
marketing and distribution of our oral probiotic technology in Asia and Europe.
European and Asian companies have signaled their intent to establish a licensing
agreement with us, while another potential partner is completing a laboratory
evaluation of the product before moving forward with possible licensing
discussions. Product launch in select markets is currently expected to occur in
2007.
Market Opportunity
Probiotics are relatively common in Japan and are being adopted with
increasing frequency in Europe. The probiotics market in the U.S. is still
emerging and we expect the U.S. market will develop slowly. If successfully
developed, we expect our technology will be one of the first probiotics to be
marketed for the promotion of oral health.
Competition
Many companies sell probiotics that are principally designed for digestive
health, vaginal and urinary tract health, and immune system support. Our product
will not compete directly with the products of these companies. Recently,
researchers at the University of Hiroshima in Japan have published studies
indicating that 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.
13
IVIAT and CMAT
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. Two of our directors own
an aggregate 19.1% interest in iviGene Corporation.
To support the research for this technology in 2004, we 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 supported initial research to help us identify genes of Mycobacterium
tuberculosis that are specifically induced during human infections with that
pathogen. This licensed technology is in its early stages and will require
further development which will require additional capital.
Technical Background
This technology platform was developed by our founder 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.
Intellectual Property
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. 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. We are required to pay all patent-related
expenses and commit two full-time staff or spend at least $200,000 toward
product development annually to maintain our license. In 2005 we did not meet
the requirements of committing two full-time staff or spending at least
$200,000, however, we obtained a waiver of these provisions from iviGene
Corporation, thus maintaining our license arrangement with them. We have applied
for SBIR grant funding from the National Institutes of Health and with these
funds expect to be able to meet the requirements of the license agreement in
2006.
14
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.
15
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.
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.
16
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.
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. 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
We have spent $2,097,223 and $1,990,979 on research and development of our
technologies in 2005 and 2004, respectively.
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 these 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 10 full-time employees, none of whom is represented by a labor
union. We believe that our relationship with our employees is good.
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"). The information contained on our website is not a part of this annual
report on Form 10-KSB.
17
Item 2. Description of Property.
Our administrative office and laboratory facilities are located at 13700
Progress Boulevard, Alachua, Florida 32615. We began leasing this property
pursuant to a five-year operating lease in November 2004. The facility is
approximately 5,300 square feet of which approximately 60% is laboratory space
and the remainder is office space and common areas. The twelve months rental for
2006 will be approximately $79,500, net of insurance, taxes and utilities that
are paid by us. Lease payments escalate by 3% annually. We paid approximately
$12,000 and $469,000 in 2005 and 2004, respectively, for leasehold improvements
to outfit this facility. Such improvements included equipping the building with
sufficient air-handling and building laboratory stations. We also spent
approximately $653,000 and $181,000 in 2005 and 2004, respectively, for
laboratory equipment to outfit our facility. We believe our facilities are
sufficient for our current needs and do not expect significant purchases of
property in 2006.
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.
18
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock began trading on the American Stock Exchange under the
symbol ONI on May 20, 2004. Previously it was traded on the TSX Venture Exchange
under the symbol ORA.U. We voluntarily de-listed from the TSX Venture Exchange
on October 12, 2004. The following sets forth the high and low closing bid
prices for the common stock on the TSX Venture Exchange from the beginning of
2004 through May 19, 2004 and on the American Stock Exchange from May 20, 2004
through the end of 2005. Such prices represent prices between dealers without
adjustment for retail mark ups, mark downs, or commissions and may not
necessarily represent actual transactions.
- --------------------------------------------------------------------------
2005 2004
---- ----
- --------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------
COMMON STOCK
- --------------------------------------------------------------------------
First quarter $4.00 $1.59 $4.35 $3.20
- --------------------------------------------------------------------------
Second quarter $2.40 $1.59 $4.40 $2.80
- --------------------------------------------------------------------------
Third quarter $1.85 $1.15 $3.75 $2.00
- --------------------------------------------------------------------------
Fourth quarter $1.00 $0.40 $4.45 $2.65
- --------------------------------------------------------------------------
On March 6, 2006, the closing bid price of the common stock, as reported
by the American Stock Exchange, was $0.48. As of March 6, 2006, there were
approximately 31 record holders of our common stock according to our transfer
agent. 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.
Equity Compensation Plan Information
The Company has reserved an aggregate of 1,500,000 shares of the Company's
common stock for issuance pursuant to its 2002 Stock Option and Incentive Plan.
The per share exercise price of each stock option or similar award granted under
these plans must be at least equal to the closing fair market value of the stock
on the date of grant. The following table represents the number of shares
issuable upon exercise and reserved for future issuance under these plans as of
December 31, 2005.
Number of securities
remaining available for
future issuance under
Number of Securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a)
(a) (b) (c)
- ---------------------------- -------------------------- -------------------------- --------------------------
Equity compensation
plans approved by
security holders 1,260,000 $1.90 240,000
- ---------------------------- -------------------------- -------------------------- --------------------------
Equity compensation 137,500(1) 2.75 ---
plans not approved by 25,000(1) 2.25 ---
security holders 35,000(2) 1.59 ---
3,032,500 (3) 0.60 ---
35,000(3) 0.40 ---
- ---------------------------- -------------------------- -------------------------- --------------------------
Total 4,525,000 $1.04 240,000
- ---------------------------- -------------------------- -------------------------- --------------------------
19
- -------------------
(1) Represents 137,500 warrants with an exercise price of $2.75 per share
issued on November 30, 2004, and exercisable for period of four years to
investors and the placement agent and 25,000 warrants with an exercise
price of $2.25 per share issued to the placement agent in connection with
the private placement of 250,000 shares of common stock for gross proceeds
of $687,500.
(2) Represents warrants issued to a consultant having provided investor
relations services for us during 2005. Such warrants are exercisable for a
period of three years.
(3) Represents (i) 2,937,500 warrants with an exercise price of $0.60 per share
issued to investors in connection with the private placement of 2,937,500
shares of common stock for gross proceeds of $1,175,000, and (ii) warrants
issued to Westrock Advisors, Inc. in connection with the termination of an
investment advisor agreement, 95,000 warrants with an exercise price of
$0.60 per share and 35,000 warrants with an exercise price of $0.40 per
share. The warrants issued are exercisable for a two year period.
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
On December 14, 2005, we issued a total of 2,937,500 shares of our common
stock and warrants to purchase 2,937,500 shares of our common stock in a private
placement to accredited investors. We received gross proceeds of $1,175,000 in
the private placement and incurred estimated costs of approximately $70,000
resulting in net proceeds of approximately $1,105,000. We intend to use the net
proceeds of the private placement, including any proceeds from exercise of the
warrants, for working capital and general corporate purposes. The warrants
representing shares of common stock are exercisable by the accredited investors
at any time over a two-year period at an exercise price of $0.60 per share.
In connection with the termination of an investment advisor agreement
between us and Westrock Advisors, Inc. we issued warrants on similar terms as
those issued in the private placement, representing the right to acquire 130,000
shares of common stock were issued to Westrock Advisors, Inc. Of the 130,000
shares covered by the warrants, 95,000 are at an exercise price of $0.60 per
share and 35,000 are at an exercise price of $0.40 per share.
On August 16, 2005, we entered into a consulting agreement for financial
public relations services with Investor Awareness, Inc. The terms of that
agreement provided that we pay $10,000 per month plus out-of-pocket expenses and
that we issue a common stock purchase warrant for 35,000 shares that has an
exercise price of $1.59 for three years. In November 2005, we suspended the
continuance of the consulting agreement. As of December 31, 2005, no warrants
had been exercised.
The issuance of the shares of common stock and warrants described above
were made pursuant to exemptions from registration provided by Section 4(2) of
the Securities Act of 1933 and Regulation D promulgated thereunder.
Use of Proceeds
On June 24, 2003, we completed an initial public offering (IPO) of our
common stock. The managing underwriter for our initial public offering was
Haywood Securities Inc. The shares of common stock sold in the offering 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. Under the registration statement, we registered
2,400,000 units at a price of $1.25 per unit. All 2,400,000 units were sold in
the offering that provided gross proceeds of $3,000,000 and net proceeds to us
of $2,282,612 after deducting $717,388 in commissions paid to the underwriter
and other expenses incurred in connection with the offering.
20
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. One whole Series A
warrant was exercisable on or before December 24, 2003 to acquire one share of
common stock at a price of $2.00 per share. All Series A warrants were exercised
on or prior to December 24, 2003 providing proceeds of $2,400,000. One whole
Series B warrant was exercisable on or before March 24, 2004 to acquire one
share of common stock at a price of $3.00 per share. 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 our common stock
and warrants to purchase 500,000 shares of our common stock at $1.25 per share
until June 24, 2005. All underwriter warrants were exercised providing
additional proceeds to us of $625,000. The costs associated with maintaining
this registration statement totaling $62,421 through December 31, 2005 are
netted against proceeds and recorded as a component of stockholders' equity.
Through December 31, 2005 we have applied all of the net proceeds of
$8,231,391 we received from our initial public offering as follows:
Payment 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 fees 743,018
Mutacin 1140 production research 758,878
Pre-clinical research 2,554,652
General and administration costs 2,741,877
Repayment of indebtedness incurred to purchase computer and
laboratory equipment 860,001
-------------
$ 8,231,391
Other than normal and recurring compensation (included in general
administration costs above), the deferred compensation payments 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. We believe we have used the net proceeds from the offering consistent
with our business strategy.
21
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. Our 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 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 in need of immediate substantial additional funds in order to
continue the development of our technologies. We continue to seek additional
funding and evaluate various strategic alternatives that may be available to us.
We currently do not have any commitments for funding sufficient to fully
implement our plan of operation or other strategic options and there can be no
assurances that we will be able to obtain sufficient funding or implement any
strategic options in the future. We have curtailed our operations, deferred
payments to our chief executive officer and president, chief scientific officer,
former chief executive officer and president and our board of directors, reduced
compensation by 35% to certain other executive officers and laid-off
approximately one-third of our 16 employees such that further development of our
technologies has been reduced to a minimum. Our remaining capital resources are
expected to be utilized to sustain minimal operations while we continue to
explore opportunities to raise additional capital. After the repayment of
$495,799 of the outstanding balance of our existing loan obligation in the
fourth quarter of 2005, the payment of operating costs and the receipt of funds
from our recent private placement, our remaining available working capital at
the end of 2005 was $675,006. Absent continued future funding, this remaining
capital, together with $600,000 in proceeds we received from another private
placement which closed in March 2006, is not sufficient to enable us to continue
to operate through the second quarter of 2006, at which time we will likely need
to cease all operations until we are able to raise additional capital. There can
be no assurance that such capital will be available to us. We have a contractual
obligation to pay a minimum royalty of $25,000 per quarter and spend or cause to
be spent an aggregate of $1,000,000 per annum toward research, development and
regulatory prosecution, in order to maintain our license with the University of
Florida Research Foundation, Inc. for our replacement therapy and Mutacin 1140
technologies. If we are unable to make these payments, our license could be
terminated which will substantially diminish the value of our company.
We hope to be in a position to continue to develop several products, each
of which we believe addresses 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 (S. 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 Phase III
clinical trials. To facilitate further patient recruitment in our Phase I
clinical trial, we opened an additional clinical site in June 2005,
however, we have had very limited patient enrollment through December 31,
2005 due to the rigorous requirements for enrollment imposed upon us
22
by the FDA. In January 2006, we concluded this study and discussed with
the FDA our problems with patient enrollment and how we could modify our
protocol to allow us to move forward in our clinical trials. A formal
re-submission of an amended protocol is expected to be filed with the FDA
by the end of February 2006 and we anticipate instituting a second Phase I
clinical study by the end of the second quarter of 2006. We remain
committed to complete the human safety study of replacement therapy to the
satisfaction of the FDA and we expect the cost in 2006 will be
approximately $350,000.
Mutacin 1140 is a highly potent bactericidal peptide that is
produced by our strain of Streptococcus mutans. Our proprietary mutacin was
discovered by our researchers during the course of developing replacement
therapy and is a novel antibiotic that has broad-spectrum antimicrobial
activity against essentially all Gram-positive bacteria including
vancomycin-resistant Staphylococcus aureus. The antibiotic currently is in
preclinical stages of development. During the second quarter of 2005, we
completed development of a proprietary manufacturing process for mutacin
1140, which overcame a previous hurdle to that molecule's development. We
are now able to manufacture in sufficient quantities to allow us to conduct
preclinical studies needed to enable the filing of an Investigational New
Drug (IND) application. If we are able to secure adequate funding, we plan
to continue to perform in vitro antimicrobial susceptibility and toxicity
testing during the first half of 2006 before performing more detailed
animal safety and efficacy studies using mutacin 1140. For example, in
March and April 2006 we plan to conduct two preclinical studies with MU
1140(TM), utilizing independent testing labs, that will provide information
on Tier 2 spectrum of activity against clinically important Gram-positive
bacteria and the effectiveness in a drug resistant Staphylococcus aureus
infected animal model system. Upon adequate funding and successful
completion of this testing and the animal studies we would then be
positioned to file an IND for mutacin 1140.
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 a cosmetic or as "health supplements" in certain geographic
areas without the need for extensive regulatory oversight, we believe that
with adequate funding, we may achieve commercialization of our probiotic
product in these markets by late 2006. We are continuing our efforts to
seek partners in Europe and Asia for market opportunities for our oral
probiotic technology. European and Asian companies have signaled their
intent to establish a licensing agreement with us, while another potential
partner is completing a laboratory evaluation of the product before moving
forward with possible licensing discussions. We expect to initiate a human
trial within the next two months to support product claims for Probiora
3(TM). While there can be no assurances, this study should be completed by
early in the third quarter of 2006. If successfully developed, our oral
rinse product will be one of the first probiotics to be marketed for the
maintenance of oral health.
IVIAT and CMAT are technologies we licensed from iviGene
Corporation. Two of our directors own a total of 19.1% interest in iviGene
Corporation. 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. These licensed technologies
offer 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.
We are required to pay all patent-related expenses and commit two full-time
staff or spend at least $200,000 toward product development annually to
maintain our license. In 2005 we did not meet the requirements of
committing two full-time staff or spending at least $200,000, however, we
obtained a waiver of these provisions from iviGene Corporation, thus
maintaining our license arrangement with them. As a result of our current
financial condition we currently do not have the resources to pursue our
IVIAT and CMAT technologies at this time. However, we filed for funding
under SBIR grants with the National Institutes of Health and, if such
funding becomes available, we will pursue additional research and expect
that we will maintain compliance with our license agreement requirements
with iviGene Corporation. If additional funding is not available to us, we
will need to obtain another waiver or renegotiate the terms of our license
with iviGene Corporation in order to maintain our license.
23
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 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 obtain additional capital and
take the following actions:
Replacement Therapy
1. Initiate second Phase I safety trial.
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.
Probiotic Technology
1. Develop appropriate manufacturing and packaging systems.
2. Complete one human study.
The above actions, individually and in the aggregate, are expected to be
costly to undertake and complete and will require additional capital over and
above what we currently have available to us. Our current available capital
limits our ability to fully develop our technologies. We expect to allocate our
limited capital resources to the development of our technologies while we
continue to explore additional capital raising opportunities. There can be no
assurances that such additional capital will be available to us. The time period
for the development of our technologies could change depending on the progress
of our ability to negotiate a partnering arrangement, as well as our efforts to
raise additional capital.
24
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.
25
Results of Operations
Operating Results Summary
Three Months Ended December 31
2005 2004
------------------------------------------
Revenue $ - $ 33,333
Operating expenses:
Research and development 452,853 742,557
General and administration 307,153 565,181
------------------------------------------
Total operating expenses 760,006 1,307,738
------------------------------------------
Loss from operations (760,006) (1,274,405)
Other income (expense):
Interest income 5,221 15,831
Interest expense (6,610) (442)
------------------------------------------
Total other income, net (1,389) 15,389
------------------------------------------
Loss before income taxes (761,395) (1,259,016)
Income tax benefit - -
------------------------------------------
Net loss $ (761,395) $ (1,259,016)
==========================================
Years ended December 31
2005 2004
------------------------------------------
Revenue $ - $ 196,210
Operating expenses:
Research and development 2,097,223 1,990,979
General and administration 1,166,854 1,329,983
------------------------------------------
Total operating expenses 3,264,077 3,320,962
------------------------------------------
Loss from operations (3,264,077) (3,124,752)
Other income (expense):
Interest income 41,874 47,306
Interest expense (29,175) (442)
------------------------------------------
Total other income (expense), net 12,699 46,864
------------------------------------------
Loss before income taxes (3,251,378) (3,077,888)
Income tax benefit - -
------------------------------------------
Net loss $ (3,251,378) $ (3,077,888)
==========================================
26
For the Quarters Ended December 31, 2005 and 2004
We had no revenues in the three months ended December 31, 2005 as compared
to $33,333 in the quarter ended December 31, 2004 that related to a portion of
the revenues earned on an SBIR grant. Our operating expenses decreased 42% to
$760,006 in the three months ended December 31, 2005 from $1,307,738 in same
period in 2004. Research and development expenses decreased 39% to $452,853 in
the three months ended December 31, 2005 from $742,557 in the same period in
2004, reflecting the lay-off of five R&D employees in October 2005 amounting to
approximately $150,000, the reduction in use of outside consultants amounting to
approximately $122,000, and the reduction of stock option compensation expense
of approximately $95,000, offset by increases in depreciation totaling $45,000
associated with new equipment purchases in early 2005, minimum royalty payment
to the University of Florida amounting to $25,000 and increased utility costs of
approximately $9,000. General and administration expenses decreased 46% to
$307,153 in the three months ended December 31, 2005 from $565,181 in same
period in 2004. This lower amount in 2005 reflects fewer administrative
personnel in 2005 amounting to approximately $29,000, the reduction of stock
option compensation expense of approximately $152,000, the reduction in use of
outside consultants amounting to approximately $17,000, the reduction in travel
and entertainment expenses of approximately $19,000, the reduction in the
premium cost of Directors' and Officers' Liability Insurance amounting to
approximately $9,000 and higher than normal supply costs in 2004 to outfit our
new building amounting to approximately $34,000.
Interest income decreased 67% to $5,221 in the three months ended December
31, 2005 from $15,831 in the same period in 2004 as a result of lower cash
balances in 2005. Interest expense increased to $6,610 in the three months ended
December 31, 2005 from $442 during the same period in 2004. This increase of
$6,168 reflects the interest paid on our equipment loan in 2005 that was not
active in 2004 and was retired in December 2005.
Our net loss decreased 40% to $761,395 during the three months ended
December 31, 2005 from $1,259,016 in the same period in 2004. The decrease in
our net loss was principally caused by the lay-off of personnel, the reduction
in stock option compensation expense and the reduced use of outside consultants.
For the Years Ended December 31, 2005 and 2004
We had no revenues in the year ended December 31, 2005 as compared to
$196,210 in 2004. This is a result of having two Small Business Innovation
Research Grants for our Mutacin 1140 and IVIAT technologies in 2004. Our
operating expenses decreased 2% to $3,264,077 for the year ended December 31,
2005 from $3,320,962 in 2004. Research and development expenses increased 5% to
$2,097,223 in 2005 from $1,990,979 in 2004, reflecting higher depreciation costs
of approximately $203,000 associated with new equipment purchases in early 2005,
higher facility costs of approximately $70,000 associated with the rent and
utilities of the building we began renting in late 2004, the start of paying
minimum royalty fees to the University of Florida amounting to $100,000, higher
personnel costs for the entire year of approximately $46,000 and the payment of
product liability insurance premiums of approximately $19,000 associated with
our clinical trials, offset by the reduction of stock option compensation
expense of approximately $208,000, higher recruiting and relocation costs in
2004 of approximately $77,000, higher outside consulting costs in 2004 of
approximately $44,000 mostly caused by the manufacture of clinical trial
materials and higher travel expenses in 2004 of approximately $11,000. General
and administration expenses decreased 12% to $1,166,854 in 2005 from $1,329,983
in 2004, reflecting the reduction of stock option compensation expense of
approximately $333,000, fees of approximately $64,000 paid to the American Stock
Exchange in 2004 for the initial listing of our shares, the reduction in the use
of outside consultants amounting to approximately $49,000, the reduction of
travel and entertainment expenses in 2005 approximating $47,000, higher than
normal supply costs in 2004 to outfit the our new building amounting to
approximately $34,000 and staff lay-offs amounting to approximately $9,000,
offset by fees associated with attempted financings of approximately $108,000,
increased legal and accounting fees approximating $114,000, the severance
charges for our former CEO approximating $90,000, costs associated with hiring a
new CEO totaling approximately $28,000, higher depreciation costs of
approximately $16,000 in 2005 and higher facility costs in 2005 of approximately
$14,000.
Interest income decreased 11% to $41,874 in the year ended December 31,
2005 from $47,306 in 2004, which was a result of higher average cash balances
maintained in 2004 due to the exercise of Series A and Series B common stock
warrants in December 2003 and March 2004, respectively. Interest expense
increased to $29,175 in 2005 from $442 in 2004. This increase of $28,733
reflects the payments on our equipment loan in 2005 that was not active in 2004
and was retired in December 2005.
27
Our net loss increased 6% to $3,251,378 in the year ended December 31,
2005 from $3,077,888 in 2004. The increase in our net loss was principally
caused by having no revenues in 2005, incurring fees associated with attempted
financings, increased fees paid for professional services, increased
depreciation charges and minimum royalty fees paid to the University of Florida,
offset by the reduction of stock option compensation expenses, and the
significant cut-backs in the fourth quarter of 2005 for personnel, use of
outside consultants and travel costs.
Liquidity and Capital Resources
Our operating activities used cash of $3,437,118 for the year ended
December 31, 2005 and $2,745,243 for the year ended December 31, 2004. Our
working capital was $675,006 as of December 31, 2005. Cash used by operations in
the year ended December 31, 2005 resulted primarily from operating losses from
operations of $3,251,378.
Our investing activities used cash of $663,268 for the year ended December
31, 2005 for the acquisition of laboratory equipment.
Our financing activities provided $1,372,195 in cash for the year ended
December 31, 2005, which came from four sources. In the first quarter of 2005,
we entered into a loan agreement with a bank that provided funds of
approximately $615,000, however, the entire loan principal was repaid before
year end. Common stock warrants issued in connection with our IPO in June 2003
were exercised during the first half of 2005 providing funds of approximately
$345,000. In the third quarter of 2005, we issued common stock under our
agreement with Fusion Capital that provided funds of $35,000. In the fourth
quarter of 2005, we issued common stock and warrants in a private placement that
provided gross proceeds of $1,175,000. Additional details of these financings
are provided below:
Loan Agreement - On February 24, 2005, we entered into a Business Loan
Agreement with a bank that funded $615,192 of laboratory equipment
purchases. We made monthly payments of interest and principal, having also
made an accelerated payment of $200,000 in October 2005 and a final payment
of approximately $296,000 in December 2005. Thus, the entire loan balance
had been repaid at December 31, 2005. The loan had 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 $19,000 per month.
Interest was calculated at the prime rate as published in the Wall Street
Journal (8.00% in December, 2005) plus 1.00%. The loan was collateralized
by the equipment purchased, as well as all equipment owned by us at the
time of the agreement. The original loan terms required us to maintain
working capital and tangible net worth of at least $750,000 and not allow
debt to be greater than 50% of stockholders' equity. Effective September
30, 2005, the bank amended the working capital covenant to provide that
working capital not be lower than $350,000. The bank also amended the
debt-to-equity covenant whereby debt could not be greater than 56% of
stockholders' equity. Thus, we were in compliance with the loan covenants
throughout the term of the loan. We incurred interest of $29,176 during the
year.
Exercise of Warrants - On June 24, 2003, we completed the filing of an
IPO whereby the underwriting agent received 100,000 shares of our common
stock and warrants to purchase 500,000 shares of our common stock at $1.25
per share that were exercisable until June 24, 2005. All of these warrants
have been exercised. During 2005, the remaining outstanding warrants to
acquire 276,180 shares of common stock were exercised prior to their
expiration and 276,180 shares of common stock were issued providing
additional proceeds to the Company of $345,225.
Fusion Capital - On May 23, 2005, we entered into a Common Stock
Purchase Agreement ("Purchase Agreement") with Fusion Capital. Pursuant to
the terms of the Purchase Agreement, Fusion Capital has agreed to purchase
from us up to $9,000,000 of our common stock over a 30 month period. On
each trading day during the term of the Purchase Agreement, we have the
right to sell to Fusion Capital $15,000 of our common stock at a price
based upon the market price of the common stock on the date of each sale
28
without any fixed discount to the market price. At our option, Fusion
Capital can be required to purchase fewer or greater amounts of common
stock each month. Fusion Capital does not have the right or obligation to
purchase shares of our common stock from us in the event that the price of
our common stock is less than $0.75. Subject to the foregoing, we have the
right to control the timing and the number of shares sold to Fusion
Capital. This offering was made pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
Pursuant to the terms of a registration rights agreement we entered into
with Fusion Capital in connection with the Purchase Agreement, dated May
23, 2005, we agreed to file a registration statement with the Securities
and Exchange Commission covering the resale of the shares which may be
purchased by Fusion Capital under the Purchase Agreement. The registration
statement was declared effective on June 23, 2005 and the American Stock
Exchange approved the listing of the shares on July 7, 2005. We incurred
costs of approximately $150,000 for legal, accounting, stock exchange, and
regulatory fees in connection with this financing arrangement. During the
year, we sold 22,092 of our shares to Fusion Capital pursuant to the
Purchase Agreement for total proceeds of $35,000. Because our stock price
has traded below the $0.75 threshold since November 23, 2006, Fusion
Capital is not obligated to purchase any shares of our common stock from
us.
Private Placement, December 2005 - On December 14, 2005, we issued a
total of 2,937,500 shares of our common stock and warrants to purchase
2,937,500 shares of our common stock in a private placement to accredited
investors. The issuance of the shares of common stock and warrants was made
pursuant to the exemptions from registration provided by Section 4(2) of
the Securities Act and Regulation D promulgated thereunder. We received
gross proceeds of $1,175,000 in the private placement and incurred
estimated costs of approximately $70,000 resulting in net proceeds of
approximately $1,105,000. We intend to use the net proceeds of the private
placement, including any proceeds we may receive from exercise of the
warrants, for working capital and general corporate purposes. The warrants
representing shares of common stock are exercisable by the accredited
investors at any time over a two-year period at an exercise price of $0.60
per share. Pursuant to the terms of a registration rights agreement, dated
December 14, 2005, the Company agreed to file a registration statement with
the Securities and Exchange Commission covering the resale of the acquired
shares and the shares able to be acquired upon exercise of the warrants.
The Company filed a registration statement on January 13, 2006 and it was
declared effective on January 27, 2006.
Private Placement, March 2006 - On March 6, 2006, we issued a total of
1,500,000 shares of our common stock and warrants to purchase 1,500,000
shares of our common stock in a private placement to accredited investors.
The issuance of the shares of common stock and warrants was made pursuant
to the exemptions from registration provided by Section 4(2) of the
Securities Act and Regulation D promulgated thereunder. We received gross
proceeds of $600,000 in the private placement and incurred estimated costs
of approximately $75,000 resulting in net proceeds of approximately
$525,000. We intend to use the net proceeds of the private placement,
including any proceeds we may receive from exercise of the warrants, for
working capital and general corporate purposes. There was no underwriter or
placement agent associated with this transaction. Each warrant is
exercisable on or before January 6, 2008 to acquire one share of common
stock at a price of $0.60 per share. Pursuant to the terms of a
registration rights agreement, dated January 6, 2006, the Company agreed to
file a registration statement with the Securities and Exchange Commission
covering the resale of the acquired shares in the private placement and the
shares able to be acquired upon exercise of the warrants within 45 of days
of the closing of the transaction.
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 operations during the last two
fiscal years and have an accumulated deficit of $8,723,362 as of December 31,
2005. Cash used in operations for 2005 and 2004 was $3,434,382 and $2,745,243,
respectively. At December 31, 2005, our principal source of liquidity was
$937,789 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, as well as
conducting basic research. 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.
29
Because of our limited available financial resources, we took steps during
the second half of 2005 to reduce our expenditure of cash. We curtailed hiring,
froze salaries, reduced our matching contributions for the employee retirement
plan, appreciably reduced travel and other operating costs, decreased the use of
outside consultants and delayed the production of additional supplies of our
replacement therapy technology to be used in later clinical studies. These
efforts resulted in reducing operating expenses to below $200,000 per month. As
of December 31, 2005, we also deferred, $56,500 in compensation to certain
officers and board members, consisting of $26,250 each in payments to Jeffrey
Hillman, our Chief Scientific Officer, and Robert Zahradnik, our President &
Chief Executive Officer, and $3,500 in Audit Committee meeting fees to
directors. The officer compensation deferrals and meeting fee deferral amounts
were agreed to be deferred until such time as we obtain sufficient funding that
payment can be made. There is no time period on the payment of the deferred
amounts concerning our officers and directors. As of December 31, 2005, we also
orally agreed with our former chief executive officer to defer certain payments
due pursuant to our separation agreement, which amounted to a deferral of
$40,500 of such payments due to our former chief executive officer. As part of
the oral agreement with our former chief executive officer, we are currently
paying $7,500 per month which is one half of the monthly amount due of $15,000
under the separation agreement. These payments were originally to be concluded
in July of 2006, but due to the deferred amount and the current payment schedule
these payments are expected to continue beyond that time period until paid. The
deferrals of payments to our former chief executive officer, current officers
and directors, do not reduce our expenses, but serve to preserve our limited
cash resources to the extent necessary to maintain our operations.
Our capital requirements for 2006 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.
Subject to our ability to raise additional capital, we expect to need to incur
substantial expenditures to further develop each of our technologies including
continued increases in costs related to research, preclinical testing and
clinical studies, as well as significant costs associated with being a public
company. Our working capital at December 31, 2005 is not adequate to meet our
business objectives as 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.
Our future success depends on our ability to continue 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 fully support our
plans going forward. Until such time as additional financing for our operations
is obtained, we expect to continue to need to curtail our spending. While we
continue to focus on completing the Phase I clinical trial for our replacement
therapy technology, conducting animal studies for our mutacin 1140 antibiotic
technology and developing strategic partners for our probiotic technology, we do
not have sufficient capital resources to complete these projects. With continued
limits on spending, and considering the recent private placement financings, we
believe we will have cash resources to continue minimum operations through the
end of the second quarter of 2006. Thereafter, without sufficient capital to
fund our operations, we will be unable to continue as a going concern and will
have to cease operations.
30
RISK FACTORS
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-KSB 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-KSB 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.
Risks Associated with Our Company
We will require additional financing to sustain our operations and without it we
will not be able to continue operations.
We have incurred annual operating losses of $3,251,378, $3,077,888 and
$1,672,954, respectively, during the past three fiscal years of operation. As a
result, at December 31, 2005 we had an accumulated deficit of $8,723,362. We
have generated minimal revenues to date and our revenues have not been
sufficient to sustain our operations. Although we recently completed two
financings totaling $1,775,000 for the private placement of equity securities,
we do not currently expect to have sufficient capital to sustain our operations
beyond the second quarter of 2006. If we are not able to raise additional
capital, among other things:
o We will need to cease operations and be unable to pursue
further development of our technologies;
o We will have to lay-off our personnel;
o We could be unable to continue to make public filings;
o We will be delisted from the American Stock Exchange; and
o Our licenses for our replacement technology and Mutacin 1140
technology could be terminated which would significantly harm
our business.
At December 31, 2005, we had working capital of approximately $675,000.
The independent registered public accounting firm's report for the year ended
December 31, 2005, includes an explanatory paragraph to their audit opinion
stating that our recurring losses from operations and limited working capital
raise substantial doubt about our ability to continue as a going concern. We
have an operating cash flow deficit of $3,434,382 for the year ended December
31, 2005, and have sustained operating cash flow deficits of $2,745,243 in 2004
and $1,218,910 in 2003. Our ability to obtain additional funding will determine
our ability to continue as a going concern. Our financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
We have a limited operating history with significant losses and expect losses to
continue for the foreseeable future.
We have yet to establish any history of profitable operations. Our limited
revenues to date have not been related to the commercialization or licensing of
our products and have not been sufficient to sustain our operations. We expect
that our revenues will not be sufficient to sustain our operations for the
foreseeable future. Our profitability will require the successful
commercialization of our replacement therapy, probiotic and Mutacin 1140
technologies. No assurances can be given when this will occur or that we will
ever be profitable.
We must spend at least $1 million annually on development of our replacement
therapy and Mutacin 1140 technologies and $100,000 annually as minimum royalties
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.
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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. In addition, we must pay $25,000 per quarter as minimum
royalties to the University of Florida Research Foundation, Inc. under our
license agreements. If we do not, our licenses on these technologies could be
terminated. We also hold a license for our IVIAT and CMAT technologies from
iviGene Corporation, which required us to either find two full time resources or
invest $200,000 annually toward development of these technologies. In 2005 we
did not meet the requirements of committing two full-time staff or spending at
least $200,000, however, we obtained a waiver of these provisions from iviGene
Corporation, thus maintaining our license arrangement with them. We have applied
for SBIR grant funding from the National Institutes of Health and with these
funds expect to be able to meet the requirements of the license agreement in
2006. Until commercial sales of any developed 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. (101) 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 agreements. There is no assurance that we will be able
to comply with these conditions. 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. In addition, iviGene Corporation
may terminate our license in respect of our IVIAT and CMAT technologies if we
breach or are unable to meet our obligations under the terms of our license.
There can be no assurance that we will be able to comply with the obligations of
our license with iviGene Corporation. If our license is terminated we will be
unable to develop these technologies.
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 Food and Drug Administration (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
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.
32
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 licensing these technologies to third parties or 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 stockholders. 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.
Each of the technologies we are developing for eventual commercialization will
face various forms of competition from other products in the marketplace.
The pharmaceutical and biotechnology industries are characterized by
intense competition, rapid product development and technological change. Most of
the competition that the products developed from our technologies will face will
come from companies that are large, well established and have greater financial,
marketing, sales and technological resources than we have. Commercial success of
our technologies will depend on our ability and the ability of our sublicensees
to compete effectively in product development areas such as, but not limited to,
drug safety, efficacy, ease of use, patient or customer compliance, price,
marketing and distribution. There can be no assurance that competitors will not
succeed in developing products that are more effective than the products
developed from our technologies or that would render our products obsolete and
non-competitive.
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, Robert T. Zahradnik 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 agreement with Dr. Hillman, which automatically renews for one-year
term 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 S. mutans to be effective in preventing tooth decay in animals. 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 oral probiotic technology has been undertaken solely in
animals. Those studies have shown our technology to be
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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 (IND) 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.
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.
34
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 by sublicensing our technologies to strategic partners.
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, or if third parties claim we are infringing their intellectual
property rights, others could compete against us more directly or we could
suffer significant litigation. Such results could prevent us from marketing our
products and 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.
35
In the event of an 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.
B.C. International Corporation's 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 B.C. International Corporation. If
necessary, we would need to be prepared to assert our rights vigorously with
respect to such matter, which we may not be able to do without sufficient
funding. 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.
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 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.
36
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
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.
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 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. 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 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 be no earlier
than our fiscal year ending December 31, 2006.
37
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.
Risk Factors Relating to our Common Stock
Any sale of our common stock to Fusion Capital under its Common Stock Purchase
Agreement with us will cause dilution and the sale of the shares of common stock
acquired by Fusion Capital thereunder could cause the price of our common stock
to decline.
We have entered into a stock purchase agreement with Fusion Capital to
sell up to $9.0 million of our common stock to them. However, Fusion Capital
neither has the right nor the obligation to purchase any shares of our common
stock on any trading days that the market price of our common stock is less than
$0.75. Our common stock price has traded below $0.75 and as of March 6, 2006 was
trading below $0.75, which prohibits the availability of funding from Fusion
Capital under our agreement with them. The purchase price for the common stock
to be sold to Fusion Capital pursuant to the common stock purchase agreement
with Fusion Capital will fluctuate based on the price of our common stock. All
shares acquired by Fusion Capital and resold pursuant to a registration
statement will be freely tradable. Fusion Capital may sell none, some or all of
the shares of common stock purchased from us at any time. We expect that the
shares offered pursuant to the registration statement we filed in connection
with our obligation under the Fusion Capital transaction will be sold over a
period of up to 30 months from the date of the effectiveness of the registration
statement. Depending upon market liquidity at the time, a sale of such shares at
any given time could cause the trading price of our common stock to decline. The
sale of a substantial number of shares of our common stock, or anticipation of
such sales, could make it more difficult for us to sell equity or equity-related
securities in the future at a time and at a price that we might otherwise wish
to effect sales. As long as our stock price is below $0.75 we will not be able
to sell any shares of our common stock to Fusion Capital in which case our
ability to acquire needed capital will be adversely affected and our business
could be harmed.
Our stock price historically has been volatile and our stock's trading volume
has been low.
The market price of our common stock has been and is expected to continue
to be highly volatile. Factors, including announcements of technological
innovations by us or other companies, regulatory matters, new or existing
products or procedures, concerns about our financial position, operating
results, litigation, government regulation, developments or disputes relating to
agreements, patents or proprietary rights, may have a significant impact on the
market price of our stock. In addition, potential dilutive effects of future
sales of shares of common stock by stockholders and by the Company, including
Fusion Capital pursuant to this prospectus and subsequent sale of common stock
by the holders of warrants and options could have an adverse effect on the
market price of our shares.
Although our common stock began trading on the American Stock Exchange
under the symbol "ONI" on May 20, 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:
38
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 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 January
9, 2006 our stock price has fluctuated from $4.45 to $0.35 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 6, 2006, there were 19,646,117 shares of our common stock outstanding,
with another 4,765,000 shares of common stock issuable upon exercise of warrants
to investors and underwriters, 1,170,000 shares issuable upon exercise of
options issued and an additional 330,000 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. As of March 6, 2006, we had 1,320,106 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 subject to release from escrow on June 24, 2006 and until such time
are subject to the limitations of the respective escrow agreements. Of these
shares 1,230,115 are held by principals of the Company and two former Directors
of the Company and 89,991 are held by the University of Florida Research
Foundation, Inc. Through March 6, 2006, approximately 6,970,649 shares held by
principals (including former directors) and 509,949 shares held by the
University of Florida Research Foundation, Inc. have been released from escrow.
The released shares held by the principals (excluding former directors) may 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 once
released from escrow.
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 stockholders 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.
39
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 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.
The Securities and Exchange Commission has adopted Rule 3a51-1 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, Rule
15g-9 require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receives from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the SEC relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
Forward-Looking Statements
The terms "Oragenics," "Company," "we," "our," and "us" refer to
Oragenics, Inc. 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, as amended. Such forward-looking statements
include statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) trends affecting our financial condition or results of operations,
(e) our ability to continue to control costs and to meet our liquidity and other
financing needs, (f) our ability to respond to and meet regulatory demands, and
(g) our anticipated needs for working capital. Because such statements involve
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Forward-looking
statements, which involve assumptions and describe our future plans, strategies,
and expectations, are generally identifiable by use of the words "may," "will,"
"should," "expect," "anticipate," "estimate," "believe," "intend," or "project"
or the negative of these words or other variations on these words or comparable
terminology. 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, 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.
40
Item 7. Financial Statements.
Incorporated by reference to pages F-1 to F-17 at the end of this report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Changes in Registrant's Certifying Accountants
(a) Dismissal of Previous Independent Registered Public Accounting Firm:
(i) On August 26, 2005 the Audit Committee of the Board of Directors of
Oragenics, Inc. ("the Company"), dismissed Ernst & Young LLP as the Company's
independent registered public accounting firm.
(ii) The reports of Ernst & Young LLP on the Company's financial
statements as of and for the years ended December 31, 2003 and 2004, did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles, except that
the report of Ernst & Young LLP on the Company's financial statements as of and
for the year ended December 31, 2004 was modified for a going concern
uncertainty.
(iii) During the Company's fiscal years ended December 31, 2003 and 2004,
and the subsequent interim period from January 1, 2005 through August 26, 2005,
there were no disagreements with Ernst & Young LLP on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to the satisfaction of Ernst & Young LLP would
have caused Ernst & Young LLP to make reference to the matter in their report.
(iv) The Company requested Ernst & Young LLP to furnish it with a letter
addressed to the Commission stating whether it agrees with the above statements.
A copy of that letter, dated August 29, 2005, was filed as Exhibit 16 to the
Form 8-K originally filed on August 29, 2005 and amended on August 31, 2005.
(b) Engagement of New Independent Registered Public Accounting Firm:
On August 26, 2005, the Audit Committee of the Company's Board of
Directors approved the engagement of Kirkland, Russ, Murphy and Tapp, PA as the
Company's independent registered public accounting firm for the year ending
December 31, 2005. Prior to the dismissal of Ernst & Young LLP, the Company did
not consult with Kirkland, Russ, Murphy and Tapp, PA regarding:
(i) the application of accounting principles to a specified
transaction, either completed or proposed; or
(ii) the type of audit opinion that might be rendered on the
Company's financial statement.
Item 8A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as such term is defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange
Act"), that are designed to ensure that information required to be disclosed in
our Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. We
conducted an evaluation (the "Evaluation"), under the supervision and with the
participation of our 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") as of the end of the period
covered by this report pursuant to Rule 13a-15 of the Exchange Act. Based on
this Evaluation, our CEO and CFO concluded that our Disclosure Controls were
effective as of the end of the period covered by this report.
42
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
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.
Item 8B. Other Information.
None.
43
PART III
Certain information required by Part III is omitted from this Report in
that we expect to file a definitive proxy statement with the Securities and
Exchange Commission (the "Commission") within 120 days after the end of our
fiscal year pursuant to Regulation 14A, as promulgated by the Commission, for
our 2006 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 our Proxy Statement. We have adopted a Code
of Business Conduct and Ethics (the "Code") that applies to all of our
Directors, officers and employees, including our principal executive officer and
principal financial officer. The Code is posted on our website at
www.oragenics.com. We intend to disclose any amendments to the Code by posting
such amendments on our website. In addition, any waivers of the Code for
Directors or executive officers of the Company will be disclosed in a report on
Form 8-K.
Item 10. Executive Compensation.
The information required by this Item 10 with respect to management
remuneration and transactions is incorporated herein by reference to our Proxy
Statement under the heading "Executive Compensation." (161) 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 our 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
our Proxy Statement under the heading "Certain Relationships and Related
Transactions."
Item 13. Exhibits.
Incorporated by reference to the Exhibit Index immediately following the
signature page.
Item 14. Principal Accountant Fees and Services.
The information required by this Item 14 is incorporated herein by
reference to our Proxy Statement under the heading "Principal Accountant Fees
and Services."
44
Oragenics, Inc.
Financial Statements
Years ended December 31, 2005 and 2004
Contents
Index to Financial Statements..............................................................F-1
Report of Kirkland Russ Murphy & Tapp, PA, Independent Registered Public Accounting Firm...F-2
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm.................F-3
Audited Financial Statements
Balance Sheet.........................................................................F-4
Statements of Operations..............................................................F-5
Statements of Changes in Stockholders' Equity.........................................F-6
Statements of Cash Flows..............................................................F-7
Notes to Financial Statements.........................................................F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Oragenics, Inc.
We have audited the accompanying balance sheet of Oragenics, Inc. as of December
31, 2005, and the related statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 2005. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (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 audit provides 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. as of December
31, 2005, and the results of its operations and its cash flows for the year
ended December 31, 2005 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming Oragenics,
Inc. will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring operating losses, negative operating cash flows
and has an accumulated deficit. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
February 15, 2006 /s/ Kirkland Russ Murphy & Tapp, PA
Clearwater, Florida Certified Public Accountants
F-2
Report of Independent Registered Public Accounting Firm on Financial Statements
The Board of Directors and Shareholders of
Oragenics, Inc.
We have audited the statements of operations, changes in stockholders' equity
and cash flows of Oragenics, Inc for the year ended December 31, 2004. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Oragenics,
Inc. for the year ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Oragenics, Inc. will continue as a going concern. As more fully described in
Note 1, the Company has incurred operating losses, negative operating cash flows
and has an accumulated deficit. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Certified Public Accountants
January 28, 2005
Tampa, Florida
F-3
Oragenics, Inc.
Balance Sheet
December 31, 2005
Assets
Current assets:
Cash and cash equivalents $ 937,789
Prepaid expenses and other current assets 112,047
------------
Total current assets 1,049,836
Property and equipment, net 1,096,564
------------
Total assets $ 2,146,400
============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 374,830
------------
Total current liabilities 374,830
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;
18,146,117 shares issued and outstanding 18,146
Additional paid in capital 10,476,786
Accumulated deficit (8,723,362)
------------
Total stockholders' equity 1,771,570
------------
Total liabilities and stockholders' equity $ 2,146,400
============
See accompanying report of Independent Registered Public Accounting Firm and
notes to the financial statements.
F-4
Oragenics, Inc.
Statements of Operations
Year ended December 31
2005 2004
-------------------------------
Revenue $ - $ 196,210
Operating expenses:
Research and development 2,097,223 1,990,979
General and administration 1,166,854 1,329,983
-------------------------------
Total operating expenses 3,264,077 3,320,962
-------------------------------
Loss from operations (3,264,077) (3,124,752)
Other income (expense):
Interest income 41,875 47,306
Interest expense (29,176) (442)
-------------------------------
Total other income (expense), net 12,699 46,864
-------------------------------
Loss before income taxes (3,251,378) (3,077,888)
Income tax benefit - -
-------------------------------
Net loss $ (3,251,378) $ (3,077,888)
===============================
Basic and diluted net loss per share $ (0.22) $ (0.22)
===============================
Shares used to compute basic and diluted net loss per share 15,082,098 14,118,129
===============================
See accompanying report of Independent Registered Public Accounting Firm and
notes to the financial statements.
F-5
Oragenics, Inc.
Statements of Changes in Stockholders' Equity
Years ended December 31, 2005 and 2004
Common Stock Additional Total
--------------------------- Paid In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------------------------------------------------------------------------
Balance at December 31, 2003 13,296,204 13,296 5,820,697 (2,394,096) 3,439,897
Exercise of common stock warrants 1,048,720 1,049 3,034,724 - 3,035,773
Costs associated with filing initial
public
offering post effective amendment - - (62,421) - (62,421)
Issuance of common stock and warrants 250,000 250 544,676 - 544,926
Compensation credit relating to option
issuances - - 156,157 - 156,157
Net loss - - - (3,077,888) (3,077,888)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Balance at December 31, 2004 14,594,924 14,595 9,493,833 (5,471,984) 4,036,444
Exercise of common stock warrants 276,180 276 344,949 - 345,225
Issuance of common stock and warrants 3,275,013 3,275 1,023,695 - 1,026,970
Compensation expense relating to option
issuances - - (385,691) - (385,691)
Net loss - - - (3,251,378) (3,251,378)
--------------------------------------------------------------------------
Balance at December 31, 2005 18,146,117 $ 18,146 $ 10,476,786 $ (8,723,362) $ 1,771,570
==========================================================================
See accompanying report of Independent Registered Public Accounting Firm and
notes to the financial statements.
F-6
Oragenics, Inc.
Statements of Cash Flows
Year ended December 31
2005 2004
---------------------------------
Operating activities
Net loss $ (3,251,378) $ (3,077,888)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 260,636 41,987
Stock-based compensation (credit) expense (385,691) 156,157
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (3,151) (84,258)
Accounts payable and accrued expenses (54,798) 289,013
Accrued interest - (25,582)
Deferred compensation - (44,672)
---------------------------------
Net cash used in operating activities (3,434,382) (2,745,243)
Investing activity
Purchases of property and equipment (666,268) (690,548)
---------------------------------
Net cash used in investing activity (666,268) (690,548)
Financing activities
Net proceeds from issuance of common stock 1,372,195 3,518,278
Net proceeds from bank loan 615,192 -
Repayments of bank loan principal (615,192) -
---------------------------------
Net cash provided by financing activities 1,372,195 3,518,278
---------------------------------
Net (decrease) increase in cash and cash equivalents (2,728,455) 82,487
Cash and cash equivalents at beginning of year 3,666,244 3,583,757
---------------------------------
Cash and cash equivalents at end of year $ 937,789 $ 3,666,244
=================================
Supplemental disclosure of cash flow information
Interest paid $ 29,176 $ 26,024
=================================
See accompanying report of Independent Registered Public Accounting Firm and
notes to the financial statements.
F-7
Oragenics, Inc.
Notes to Financial Statements
December 31, 2005
1. Organization and Significant Accounting Policies
Oragenics, Inc. is dedicated to developing technologies associated with oral
health, broad spectrum antibiotics and other general health benefits. The
Company has licensed two unique technologies from the University of Florida:
replacement therapy for the prevention of tooth decay and mutacin 1140, a novel
antibiotic. The Company has also developed a probiotics technology to provide
protection against the causative organisms of periodontal disease and has
licensed two related platform technologies that enable the simple, fast
identification of gene targets associated with the natural onset and progression
of infections, cancers and other diseases.
Basis of Presentation
The financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America
including the assumption of a going concern basis which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. The Company incurred a net loss of $3,251,378 for the
year ended December 31, 2005 and as of that date had an accumulated deficit of
$8,723,362. Cash used in operations for the years ended December 31, 2005 and
2004 was $3,434,382 and $2,745,243, respectively, and cash flow from operations
was negative throughout 2005. The Company expects to incur substantial
expenditures to further develop each of its technologies. The Company believes
its working capital at December 31, 2005 will be insufficient to meet the
business objectives as presently structured. Management recognizes that the
Company must generate additional capital resources or consider modifications to
its technology development plans to enable it to continue as a going concern.
Management's plans include seeking financing, alliances or other partnership
agreements with entities interested in the Company's technologies, or other
business transactions that would generate sufficient resources to assure
continuation of the Company's operations and research and development programs.
The Company intends to seek additional funding through sublicensing
arrangements, joint venturing or partnering, sales of rights to technology,
government grants and public or private financings. During 2005 the Company
conducted a private placement to raise capital. During 2006 the Company expects
to raise additional capital through selling additional debt or equity securities
on terms acceptable to the Company. There can be no assurance that additional
financing will be available to the Company on acceptable terms, or at all. The
Company's future success depends on its ability to raise capital and ultimately
generate revenue and attain profitability. The Company 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 it or, if
available, will be on terms acceptable to the Company. If the Company issues
additional securities to raise funds, these securities may have rights,
preferences, or privileges senior to those of its common stock, and the
Company's current stockholders may experience dilution. If the Company is unable
to obtain funds when needed or on acceptable terms, the Company may be required
to curtail its current development programs, cut operating costs and forego
future development and other opportunities. Without sufficient capital to fund
its operations, the Company 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.
Concentrations of Credit Risk
The Company's cash and cash equivalents are deposited in a financial institution
and consist of demand deposits and overnight repurchase agreement investments
and at times deposits are in excess of federally insured limits.
F-8
Oragenics, Inc.
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Property and Equipment, net
Property and equipment, net is stated at cost less accumulated depreciation and
amortization. Depreciation is provided on the straight-line method over the
estimated useful lives of the assets (three to seven years). Leasehold
improvements are amortized over the shorter of the estimated useful life or the
lease term of the related asset (five years).
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-9
Oragenics, Inc.
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Year ended December 31
2005 2004
--------------------------------
Net loss, as reported $ (3,251,378) $ (3,077,888)
Effect of stock-based employee compensation expense
(credit) included in reported net loss (385,691) 156,157
Total stock-based employee compensation
expense determined under fair value based method
for all awards (200,233) (152,545)
--------------- ---------------
Pro forma net loss $ (3,837,302) $ (3,074,276)
=============== ===============
Loss per share:
Basic and diluted - as reported $(0.22) $(0.22)
Basic and diluted - pro forma $(0.25) $(0.22)
Shares used to compute basic and diluted net loss per share 15,082,098 14,118,129
Net Loss Per Share
During all periods presented, the Company had securities outstanding that could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted net loss per share, as their effect would have
been antidilutive. Because the Company reported a net loss for all periods
presented, shares associated with the stock options and warrants are not
included because they are antidilutive. Basic and diluted net loss per share
amounts are the same for the periods presented.
Revenue Recognition
Grant revenues are recognized as the reimbursable expenses are incurred over the
life of the related grant.
Impairment of Long-Lived Assets
The Company periodically reviews their long-lived assets for impairment and
reduces the carrying value to fair value whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. There
were no impairment losses recorded during the years ended December 31, 2005 and
2004.
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.
F-10
Oragenics, Inc.
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
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
loss 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 expected to be realized by
the use of a valuation allowance.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004) "Share Based Payment" ("FAS 123(R)"), which is a revision
of FASB Statement No. 123 "Accounting for Stock Based Compensation" ("FAS 123").
This statement supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("Opinion 25") which allowed companies to use the intrinsic value
method of valuing share-based payment transactions and amends FAS Statement No.
95, "Statement of Cash Flows". FAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative. The Company will adopt FAS 123 (R) on January 1, 2006.
FAS 123(R) permits public companies to adopt its requirements using one of two
methods. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of
FAS 123(R) for all share-based payments granted after the effective date and (b)
based on the requirements of FAS 123 for all awards granted to employees prior
to the effective date of FAS 123(R) that remain unvested on the effective date.
A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under FAS 123 for purposes of
pro forma disclosures either (a) all prior periods presented or (b) prior
interim periods of the year of adoption. The Company will determine which method
to adopt prior to the effective date of FAS 123(R).
The impact of adoption of FAS 123(R) cannot be accurately predicted at this time
since it will depend on levels of share-based payments granted in the future.
However, had the Company adopted FAS 123(R) in prior periods, the impact of the
standard would have approximated the impact of FAS 123 as described in the
disclosure of pro forma net loss and loss per share in Note 1 to the financial
statements. FAS 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While the Company cannot estimate what those
amounts will be in the future (because they depend on, among other things, when
employees exercise stock options), there were no amounts of operating cash flows
recognized in prior periods for such excess tax deductions in 2005 and 2004.
As permitted by FAS 123, the Company currently accounts for share-based payments
using Opinion 25's intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options.
F-11
Oragenics, Inc.
Notes to Financial Statements (continued)
2. Property and Equipment, net
Property and equipment, net consists of the following as of December 31, 2005:
Laboratory equipment $ 876,343
Leasehold improvements 481,606
Office and computer equipment 55,107
-----------
1,413,056
Accumulated depreciation and amortization (316,492)
-----------
$ 1,096,564
===========
Depreciation and amortization expense for 2005 and 2004 was $260,636 and
$41,987, respectively.
3. Related Party Transactions
At December 31, 2005 and 2004, $55,000 and $75,000, respectively, was owed and
included in accounts payable and accrued expenses for consulting services
provided by a stockholder of the Company in prior years. No interest is being
accrued on this outstanding debt.
In January 2004, payments were made to an officer totaling $41,539 in settlement
of deferred compensation and accrued interest thereon.
In July 2005, the Company entered into a severance agreement with its former
Chief Executive Officer (CEO) agreeing to continue payments of $15,000 per month
for one year post separation from employment with the Company. The agreement
requires the former CEO to be available as a consultant to management. In the
fourth quarter of 2005, $40,500 of these payments were deferred and included in
accounts payable and accrued expenses at December 31, 2005. Beginning January 1,
2006, the Company continued to defer 50% of the payments due to the former CEO.
Interest is not being accrued on the deferred amounts.
In the fourth quarter of 2005, five members of management and the board of
directors began deferring a portion of their compensation. In December 2005,
three members of management were paid the amounts deferred, however, at December
31, 2005 two officers were owed $52,500 and amounts due to directors totaled
$3,500. Interest is not being accrued on the deferred amounts.
F-12
Oragenics, Inc.
Notes to Financial Statements (continued)
4. Business Loan Agreement
On February 24, 2005, the Company entered into a Business Loan Agreement with a
bank that funded $615,192 of laboratory equipment purchases. The Company made
monthly payments of interest and principal, having also made an accelerated
payment of $200,000 in October 2005 and a final payment of approximately
$296,000 in December 2005. Thus, the entire loan balance had been repaid at
December 31, 2005. The loan had 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 $19,000 per month. Interest was calculated at the
prime rate as published in the Wall Street Journal (8.00% in December, 2005)
plus 1.00%. The loan was collateralized by the equipment purchased, as well as
all equipment owned by the Company at the time of the agreement. The original
loan terms required the Company to maintain working capital and tangible net
worth of at least $750,000 and not allow debt to be greater than 50% of
stockholders' equity. Effective September 30, 2005, the bank amended the working
capital covenant to provide that working capital not be lower than $350,000. The
bank also amended the debt-to-equity covenant whereby debt could not be greater
than 56% of stockholders' equity. Thus, the Company was in compliance with the
loan covenants throughout the term of the loan. The Company incurred interest of
$29,176 during the year.
5. Stockholders' Equity
Common Stock
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.
All 500,000 underwriter warrants were exercised, of which 276,180 shares of
common stock were issued in 2005 providing additional proceeds to the Company of
$345,225. 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.
On November 30, 2004, the Company completed a private placement of its stock,
through a placement agent, selling 25 units at $27,500 per unit totaling
$687,500. Each unit consisted of 10,000 shares of common stock and 5,000
warrants to purchase common stock at a price of $3.50 per share until November
30, 2008. The total cost associated with this financing was approximately
$142,500 including the underwriter's commission.
On May 23, 2005, Oragenics entered into a financing arrangement whereby an
investor has agreed to purchase from the Company up to $9,000,000 of its common
stock over a 30 month period. The arrangement provides that on each trading day,
the Company has the right to sell to the investor $15,000 of its common stock at
a price based upon the market price of the common stock. The investor does not
have the right or obligation to purchase shares of our common stock from us in
the event that the price of our common stock is less than $0.75. The Company
incurred costs of approximately $150,000 for legal, accounting, stock exchange,
and regulatory fees in connection with this financing arrangement. During the
year, the Company sold 22,092 of its common stock to the investor pursuant to
the arrangement for total proceeds of $35,000.
F-13
Oragenics, Inc.
Notes to Financial Statements (continued)
5. Stockholders' Equity (continued)
On December 14, 2005, the Company issued a total of 2,937,500 shares of its
common stock and warrants to purchase 2,937,500 shares of our common stock in a
private placement to accredited investors. The Company received gross proceeds
of $1,175,000 in the private placement and incurred estimated costs of
approximately $70,000 resulting in net proceeds of approximately $1,105,000. The
warrants representing shares of common stock are exercisable by the accredited
investors at any time over a two-year period at an exercise price of $0.60 per
share. In connection with the termination of an investment advisor agreement,
the Company issued warrants on similar terms as those issued in the private
placement. The warrants represent the right to acquire 130,000 shares of common
stock, of which 95,000 are at an exercise price of $0.60 per share and 35,000
are at an exercise price of $0.40 per share.
Stock Compensation Plan
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, 2005, the Company had not awarded stock appreciation rights
or restricted stock under the Plan. The Company has reserved an aggregate of
1,500,000 shares of common stock for grants under the Plan, of which 240,000
shares are available for future grants as of December 31, 2005. The exercise
price of each option shall be determined by the Board and an option's maximum
term is ten years.
In September 2002, the Company issued 195,000 options that were re-priced upon
the change in the initial public offering 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 2004, the Company recognized compensation expense of
$156,157. During 2005, the Company recognized a credit to compensation expense
of $385,691 as a result of the decline in the fair market value of the Company's
common stock below the price of $1.25 at the IPO.
F-14
Oragenics, Inc.
Notes to Financial Statements (continued)
5. Stockholders' Equity (continued)
A summary of the status of the Company's outstanding stock options as of
December 31, 2005 and 2004 and changes during the periods ending on those dates
is presented below:
Weighted
Average
Option Price Exercise
Options Per Share Price
-------------------------------------
Outstanding at January 1, 2004 600,000 $ 1.25 - 4.00 $ 2.22
Forfeited (20,000) 2.65 2.65
Granted 175,000 3.30 - 4.25 3.83
Granted 315,000 2.25 - 2.65 2.38
-------------------------------------
Outstanding at December 31, 2004 1,070,000 1.25 - 4.25 2.52
Forfeited (392,000) 1.25 - 3.30 2.25
Granted 582,000 0.53 - 2.25 1.00
-------------------------------------
Outstanding at December 31, 2005 1,260,000 0.53 - 4.25 $ 1.90
=====================================
Exercisable at end of year 686,664 $ 0.53 - 4.25 $ 1.80
=====================================
The range of exercise price is $0.53 to $4.25 per share. The weighted-average
per option fair value of options granted during 2005 and 2004 was $0.62 and
$1.48, 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. Licenses
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. Beginning in 2004, the license
agreements provide for, among other things, the Company to make minimum annual
research expenditures of $1,000,000 and to adhere to specific milestones.
Beginning in 2005, the Company is required to pay minimum royalties on product
sales of $50,000 annually per agreement. If the Company fails to perform certain
of its obligations, UFRF may terminate the license agreements.
F-15
Oragenics, Inc.
Notes to Financial Statements (continued)
6. Licenses (continued)
In March 2004, the Company licensed from iviGene Corporation (iviGene), a
company whose major shareholders also own a significant number of shares of the
Company's common stock, applications of two novel technologies referred to as
IVIAT and CMAT. The license provides the Company 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, the Company will pay
royalties on revenues it is able to generate from any products developed using
the technology, including royalties on sublicense fees, milestone payments and
future product sales. Under the terms of the license with iviGene, the Company
is not obligated to make any payments to iviGene until it has achieved certain
milestone or royalty payments, however, Oragenics is required to spend up to
$200,000 annually on these technologies to maintain its license. To support the
research for this technology in 2004, the Company received a Phase I Small
Business Innovation Research Grant from the National Institute of Allergy and
Infectious Diseases (NIAID) of the National Institutes of Health (NIH) that paid
to the Company $96,210. In 2005 Oragenics did not meet the requirements of
committing two full-time staff or spending at least $200,000, however, the
Company obtained a waiver of these provisions from iviGene, thus maintaining our
license arrangement with them.
7. Retirement Plan
In January 2004, the Company established a defined contribution retirement plan,
replacing the previous plan that had been established in 2001. The new plan
covers all employees and provides for a Company match of up to 3% of all
employee contributions to the plan. During 2005 and 2004, employee contributions
were limited to $10,000 and $9,000, respectively, except for individuals 50
years or older for which the contribution limitations were $12,000 and $10,500,
respectively. Total matching contributions made by the Company in 2005 and 2004
were $31,895 and $28,315, respectively.
8. Income Taxes
At December 31, 2005, 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:
Deferred tax assets:
Net operating loss carryforward $ 3,170,707
Consulting services 57,010
Non qualified stock options 20,320
Tax credits 195,326
------------
Total deferred tax assets 3,443,363
Less valuation allowance (3,443,363)
------------
Total net deferred taxes $ -
============
F-16
Oragenics, Inc.
Notes to Financial Statements (continued)
8. Income Taxes (continued)
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, 2005 and 2004:
Year ended December 31
2005 2004
--------------------------
Income tax benefit computed at statutory
federal rate of 34% $(1,105,469) $ (1,046,482)
State income tax benefits, net of federal
expense/benefit (118,025) (111,727)
Change in valuation allowance 1,387,567 1,178,040
Non-deductible expenses (98,021) 60,721
Research and development credit (66,052) (80,552)
--------------------------
Total $ - $ -
==========================
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 $3,443,363
at December 31, 2005 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, 2005 was $1,387,567. At December 31,
2005, the Company has available net operating loss carryforwards of
approximately $8,426,000 that begin to expire in 2021. The Company also has a
research and development credit carryforward of $195,326 that is available to
reduce future tax liabilities through 2025.
In connection with the initial public offering and other equity financings
undertaken, it is possible that the Company has 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.
F-17
Oragenics, Inc.
Notes to Financial Statements (continued)
9. Commitments and Contingencies
The Company leased its laboratory and office space, as well certain equipment,
under a 12-month cancelable operating lease with annual renewal options. That
lease agreement terminated in November 2004 when the Company moved into a new
facility. The rent expense incurred through November 2004 was $47,376.
The new facility is being leased from a real estate developer for a term of five
years subject to renewal provisions that include 3% increases in lease payments.
This operating lease agreement required the Company to pay a deposit of $6,400
and provides for monthly lease payments of $6,400, exclusive of utilities,
insurance, sales taxes and real estate taxes. Total rent expense under this
lease was $81,653 and $10,184 for the years ended December 31, 2005 and 2004,
respectively. In addition, the Company has entered into certain operating leases
for office equipment.
Future annual minimum payments under all noncancelable operating leases are
approximately as follows:
Year ended:
2006 $ 86,600
2007 88,600
2008 87,800
2009 82,600
Thereafter -
-----------
$ 345,600
===========
10. 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.
2005
--------------------------------------------------
First Second Third Fourth
Total operating expenses..... $879,105 $874,963 $750,003 $760,006
Net loss..................... (866,130) (872,681) (751,172) (761,395)
Loss per share:
Basic and Diluted............ $ (0.06) $ (0.06) $ (0.05) $(0.05)
2004
-----------------------------------------------
First Second Third Fourth
Revenue $ - $ 44,235 $ 118,642 $ 33,333
Total operating expenses..... 544,461 723,202 745,561 1,307,738
Net loss..................... (537,440) (667,662) (613,770) (1,259,016)
Loss per share:
Basic and Diluted............ $ (0.04) $ (0.05) $ (0.04) $ (0.09)
F-18
Oragenics, Inc.
Notes to Financial Statements (continued)
11. Subsequent Event
On March 6, 2006, the Company issued a total of 1,500,000 shares of our common
stock and warrants to purchase 1,500,000 shares of our common stock in a private
placement to accredited investors. The Company received gross proceeds of
$600,000 in the private placement and incurred estimated costs of approximately
$75,000 resulting in net proceeds of approximately $525,000. There was no
underwriter or placement agent associated with this transaction. Each warrant is
exercisable on or before January 6, 2008 to acquire one share of common stock at
a price of $0.60 per share.
F-19
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 8, 2006
ORAGENICS, INC.
(Registrant)
By: /s/ Robert T. Zahradnik
------------------------------------------------------
Robert T. Zahradnik,
Chief Executive Officer and President
By: /s/ Paul A. Hassie
------------------------------------------------------
Paul A. Hassie, Chief Financial Officer, Secretary and
Treasurer (Principal Financial and 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/ Robert T. Zahradnik Chief Executive Officer and President March 8, 2006
- ------------------------------------
Robert T. Zahradnik
/s/ Paul A. Hassie Chief Financial Officer March 8, 2006
- ------------------------------------
Paul A. Hassie
/s David J. Gury Chairman March 8, 2006
- ------------------------------------
David J. Gury
/s/ Brian Anderson Director March 8, 2006
- ------------------------------------
Brian Anderson
/s/ George T. Hawes Director March 8, 2006
- ------------------------------------
George T. Hawes
/s/ Jeffrey D. Hillman Director March 8, 2006
- ------------------------------------
Jeffrey D. Hillman
64
Exhibit Index
Incorporated by Reference
------------------------------------------------
Exhibit Filing Filed
Number Exhibit Description Form File No Exhibit Date Herewith
- ------ ------------------- ---- ------- ------- ---- --------
3.1 Amended and Restated Articles of SB-2 333-100568 3.3 10/16/02
Incorporation
3.2 Bylaws SB-2 333-100568 3.2 10/16/02
4.1 Specimen Stock Certificate SB-2 333-100568 4.1 10/16/02
4.2 Form of November 2004 private placement 10-KSB 000-50614 4.3 03/14/05
warrant
4.3 Form of November 2004 private placement 10-KSB 000-50614 4.4 03/14/05
Subscription Agreement (including
registration rights)
4.4 Warrant Amendment Agreement (including form SB-2 333-125660 4.5 06/09/05
of replacement warrant) between the Company
and The Arbitrage Fund, Mark Campbell, The
Harold T. Grisham Living Trust and
Westminster Securities dated May 31, 2005
to November 2004 warrant
4.5 Common Stock Purchase Agreement with Fusion 8-K 000-50614 4.5 05/23/05
Capital Fund II, LLC, dated as of May 23,
2005
4.6 Registration Rights Agreement with Fusion 8-K 000-50614 4.6 05/23/05
Capital Fund II, LLC, dated as of May 23,
2005
4.7 Securities Purchase Agreement, dated S-3 333-131015 4.2 01/13/06
November 20, 2005, among the purchasers
and Oragenics, Inc.
4.8 Registration Rights Agreement dated S-3 333-131015 4.3 01/13/06
November 20, 2005, among the investors
and Oragenics, Inc.
4.9 Specimen private placement December 2005 S-3 333-131015 4.4 01/13/06
warrant certificate
10.1 License Agreement between the Company and SB-2 333-100568 10.1 10/16/02
the University of Florida Research
Foundation, Inc. effective August 4, 1998
for Replacement Therapy for Dental Caries
(the "Replacement Therapy License
Agreement")
10.2 First Amendment to Replacement Therapy SB-2 333-100568 10.2 10/16/02
License Agreement dated September 15, 2000
10.3 Second Amendment to Replacement Therapy SB-2 333-100568 10.3 10/16/02
License Agreement dated June 2002
10.4 Third Amendment to Replacement Therapy SB-2 333-100568 10.4 10/16/02
License Agreement dated September 25, 2002
10.5 Fourth Amendment to Replacement Therapy SB-2/A-3 333-100568 10.36 4/9/03
License Agreement and Antimicrobial
Polypeptide License Agreement dated March
2003
10.6 License Agreement between the Company and SB-2 333-100568 10.5 10/16/02
the University of Florida Research
Foundation, Inc. effective June 22, 2000
(the "Antimicrobial Polypeptide License
Agreement")
------------------------------------------------
Exhibit Filing Filed
Number Exhibit Description Form File No Exhibit Date Herewith
- ------ ------------------- ---- ------- ------- ---- --------
10.7 First Amendment to the Antimicrobial SB-2 333-100568 10.6 10/16/02
Polypeptide License Agreement dated
September 15, 2000
10.8 Second Amendment to the Antimicrobial SB-2 333-100568 10.7 10/16/02
Polypeptide License Agreement dated June
10, 2002
10.9 Third Amendment to the Antimicrobial
Polypeptide License Agreement dated
September 25, 2002
10.10 Equity Agreement between the Company and SB-2/A-2 333-100568 10.8 02/10/03
the University of Florida Research
Foundation dated August 4, 1998 (including
registration rights)
10.11 Escrow Agreement between our principals, SB-2 333-100568 99.10 10/16/02
the Company and Computershare Trust Company
10.12 Value Escrow Agreement between the Company, SB-2 333-100568 99.11 10/16/02
the University of Florida Research
Foundation, Inc. and Computershare Trust
Company
10.20+ 2002 Stock Option and Incentive Plan SB-2 333-100568 99.16 10/16/02
10.21+ Amendment No. 1 to the 2002 Stock Option DEF 14A 333-100568 App. E 04/22/04
and Incentive Plan
10.31 Proprietary Information Agreements between SB-2 333-100568 99.23 10/16/02
the Company and Brian Anderson, [Brian
McAlister], Robert Zahradnik, Howard
Kuramitsu, and Steven Projan
10.32* Proprietary Information and Invention SB-2 333-100568 99.4 10/16/02
Agreement between the Company and Jeffrey
D. Hillman
10.43* Employment agreement of Jeffrey Hillman 10-KSB 000-50614 10.43 03/17/04
10.44* Employment agreement of Paul Hassie 10-KSB 000-50614 10.44 03/17/04
10.45 Memorandum of Agreement - License Agreement 10-QSB 000-50614 10.1 08/11/04
between iviGene Corporation and the Company
10.46 Letter dated February 3, 2006 waiving X
iviGene license requirements for 2005
10.47 Lease Agreement between the Company and 10-KSB 001-32188 10.46 03/14/05
Hawley-Wiggins LLC dated January 28, 2004;
Subordination Agreement dated April 14,
2004; and First Amendment dated November
15, 2004
10.48 Termination Agreement between Westrock S-3 333-131015 10.1 1/13/06
Advisors, Inc. and Oragenics, Inc.
10.49 Agreement of Separation and Release between 10-QSB 001-32188 10.1 08/11/05
the Company and Mento S. Soponis
10.50 Employment Agreement of Robert Zahradnik 10-QSB 001-32188 10.2 08/11/05
16.0 Letter regarding change in certifying 8-K 001-32188 16.0 08/29/05
accountant
23.1 Consent of Kirkland Russ Murphy & Tapp, PA X
Incorporated by Reference
------------------------------------------------
Exhibit Filing Filed
Number Exhibit Description Form File No Exhibit Date Herewith
- ------ ------------------- ---- ------- ------- ---- --------
23.2 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
- ------------------
* management contract
+ compensatory plan or arrangement