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FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 2005.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to __________
Commission File Number: 000-50614
ORAGENICS, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-3410522
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
13700 Progress Boulevard
Alachua, Florida 32615
(Address of principal executive offices)
(386) 418-4018
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of November 4, 2005, there were 15,208,617 shares of Common Stock, $.001 par
value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004 3
Statements of Operations for the Three and Nine Months ended September 30, 2005 and
2004 (unaudited) 4
Statements of Cash Flows for the Nine Months ended September 30, 2005 and 2004
(unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operations 12
Item 3. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 5. Other Information 26
Item 6. Exhibits 27
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Oragenics, Inc.
Balance Sheets
September 30, December 31,
2005 2004
----------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 851,514 $ 3,666,244
Prepaid expenses and other current assets 135,141 108,895
----------- -----------
Total current assets 986,655 3,775,139
Property and equipment, net 1,169,186 690,932
----------- -----------
Total assets $ 2,155,841 $ 4,466,071
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 243,305 $ 429,627
Note payable 521,313 --
----------- -----------
Total current liabilities 764,618 429,627
Stockholders' equity:
Preferred stock, no par value; 20,000,000 shares authorized; none issued and
outstanding at September 30, 2005 and
December 31, 2004 -- --
Common stock, $0.001 par value; 100,000,000 shares authorized; 15,208,617 and
14,594,924 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively 15,209 14,595
Additional paid in capital 9,337,981 9,493,833
Accumulated deficit (7,961,967) (5,471,984)
----------- -----------
Total stockholders' equity 1,391,223 4,036,444
----------- -----------
Total liabilities and stockholders' equity $ 2,155,841 $ 4,466,071
=========== ===========
See accompanying notes.
3
Oragenics, Inc.
Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30 September 30
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue $ -- $ 118,642 $ -- $ 162,877
Operating expenses:
Research and development 479,466 567,743 1,644,370 1,248,423
General and administration 270,537 177,818 859,701 764,801
------------ ------------ ------------ ------------
Total operating expenses 750,003 745,561 2,504,071 2,013,224
------------ ------------ ------------ ------------
Loss from operations (750,003) (626,919) (2,504,071) (1,850,347)
Other income (expense):
Interest income 9,742 13,149 36,654 31,475
Interest expense (10,911) -- (22,566) --
------------ ------------ ------------ ------------
Total other income (expense), net (1,169) 13,149 14,088 31,475
------------ ------------ ------------ ------------
Net loss $ (751,172) $ (613,770) $ (2,489,983) $ (1,818,872)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.05) $ (0.04) $ (0.17) $ (0.13)
============ ============ ============ ============
Shares used to compute basic and diluted
net loss per share 15,201,774 14,323,380 14,856,540 14,019,561
============ ============ ============ ============
See accompanying notes.
4
Oragenics, Inc.
Statements of Cash Flows
(Unaudited)
Nine months ended
September 30
--------------------------
2005 2004
----------- -----------
Operating activities
Net loss $(2,489,983) $(1,818,872)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 188,014 16,728
Stock-based compensation (credit) (385,691) (90,977)
Changes in operating assets and liabilities:
Prepaid expenses (26,246) (162,656)
Accounts payable and accrued expenses (186,322) 186,203
Accrued interest -- (25,582)
Deferred compensation -- (44,672)
----------- -----------
Net cash used in operating activities (2,900,228) (1,939,828)
Investing activity
Purchases of property and equipment (666,268) (280,980)
----------- -----------
Net cash used in investing activity (666,268) (280,980)
Financing activities
Net proceeds from issuance of common stock 230,453 2,951,406
Proceeds from note payable 615,192 --
Principal payments on note payable (93,879) --
----------- -----------
Net cash provided by financing activities 751,766 2,951,406
Net (decrease) increase in cash and cash equivalents (2,814,730) 730,598
Cash and cash equivalents at beginning of period 3,666,244 3,583,757
----------- -----------
Cash and cash equivalents at end of period $ 851,514 $ 4,314,355
=========== ===========
See accompanying notes.
5
Oragenics, Inc.
Notes to Financial Statements
(Unaudited)
1. Organization and Significant Accounting Policies
Oragenics, Inc. (formerly known as Oragen, Inc.) (the Company) was
incorporated in November 1996; however, operating activity did not commence
until 1999. We are dedicated to developing technologies associated with oral
health, broad spectrum antibiotics and general health benefits.
Basis of Presentation
The accompanying unaudited condensed financial statements as of and for
the three and nine months ended September 30, 2005 and 2004 have been prepared
in accordance with accounting principles generally accepted in the United States
(GAAP) for interim financial information and with the instructions to Form
10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the accompanying unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial condition, results of
operations and cash flows for the periods presented. The results of operations
for the interim period September 30, 2005 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2005 or any future
period.
These unaudited financial statements should be read in conjunction with
the audited financial statements and notes thereto for the year ended December
31, 2004 which are included in our Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on March 14, 2005. In that report the Company
disclosed that it expects to need to incur substantial expenditures to further
develop each of its technologies. It further stated that it believed its working
capital will be insufficient to meet the business objectives as presently
structured and without sufficient capital to fund its operations, the Company
will be unable to continue as a going concern. In February 2005, the Company
entered into an agreement with an investment advisory firm to assist in raising
additional capital by acting as a financial advisor and placement agent. No
funds were raised by this undertaking, however, the total fees paid to the
underwriter was approximately $108,000. On August 31, 2005, we terminated the
agreement, which allowed us to seek assistance from other financial advisors.
Also, on May 23, 2005, the Company entered into a Common Stock Purchase
Agreement with Fusion Capital Fund II, LLC ("Fusion Capital") allowing the
Company to sell up to $15,000 worth of its common stock daily to Fusion Capital
at a price based on the market price. Although the Company has entered into this
agreement and is currently working with other financial advisors seeking to
raise additional equity capital, there can be no assurance that sufficient
financing will be available on acceptable terms, or at all. Without sufficient
capital to fund our operations, we will be unable to continue as a going
concern. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
6
Oragenics, Inc.
Notes to Financial Statements
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
Stock-Based Compensation
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure (FAS 148). FAS 148 amends an earlier standard on accounting for
stock-based compensation, Accounting for Stock-Based Compensation (FAS 123), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, FAS 148 amends the disclosure requirements of FAS 123 to require more
prominent disclosure about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
continues to follow the intrinsic value method of accounting as prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, to account for employee stock options issued.
The table on the following page illustrates the effects on net loss and
net loss per share as if the Company had applied the fair value recognition
provisions of FAS 123 to stock-based employee compensation.
7
Oragenics, Inc.
Notes to Financial Statements
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
Stock-Based Compensation (continued)
Three months ended Nine months ended
September 30 September 30
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss, as reported $ (751,172) $ (613,770) $ (2,489,983) $ (1,818,872)
Effect of stock-based employee
compensation (credit) included
in reported net loss (81,259) (63,700) (385,691) (90,977)
Total stock-based employee
compensation expense determined
under fair value based method
for all awards (72,326) (34,255) (194,241) (98,026)
------------ ------------ ------------ ------------
Pro forma net loss $ (904,757) $ (711,725) $ (3,069,915) $ (2,007,875)
============ ============ ============ ============
Net loss per share:
Basic and diluted --as reported $ (0.05) $ (0.04) $ (0.17) $ (0.13)
============ ============ ============ ============
Basic and diluted --pro forma $ (0.06) $ (0.05) $ (0.21) $ (0.14)
============ ============ ============ ============
Shares used to compute basic and
diluted net loss per share 15,201,774 14,323,380 14,856,540 14,019,561
============ ============ ============ ============
8
Oragenics, Inc.
Notes to Financial Statements
(Unaudited)
2. Initial Public Offering
On June 24, 2003, the Company completed the filing of 2,400,000 units at
$1.25 per unit as an initial public offering (IPO) for gross proceeds of
$3,000,000. Each unit consisted of one share of the Company's common stock,
one-half Series A Common Share Purchase Warrant and one-half Series B Common
Share Purchase Warrant. One whole Series A warrant allowed the holder to
purchase a share of the Company's stock at $2.00 per share until December 24,
2003. All Series A warrants were exercised before the expiration date providing
proceeds to the Company of $2,400,000. One whole Series B warrant allowed the
holder to purchase a share of the Company's stock at $3.00 per share until March
24, 2004. A total of 995,400 Series B warrants were exercised on or before March
24, 2004 providing proceeds of $2,986,200 and the remaining 204,600 Series B
warrants expired unexercised on March 24, 2004. In addition to receiving a cash
commission for each share sold, the underwriting agent for the IPO received
100,000 shares of common stock of the Company and warrants to purchase 500,000
shares of common stock of the Company at $1.25 per share until June 24, 2005. As
of September 30, 2005, all 500,000 underwriter warrants were exercised providing
additional proceeds to the Company of $625,000. The cost of the IPO, including
the filing of a post effective amended registration statement in October 2004,
was $779,809 including the agent's commission.
Through September 30, 2005 we have applied a total of $8,199,238 of the
$8,231,391 in net proceeds from our initial public offering as follows:
Reduction of notes payable and accrued interest thereon to
directors and officers:
Brian McAlister (Cornet Capital Corp.) $ 179,757
Robert Zahradnik 88,477
Jeffrey Hillman 15,429
Deferred compensation payable to officers 189,302
Patent expenses paid to University of Florida 100,000
Regulatory consulting and clinical trial costs 743,018
Mutacin 1140 production research 758,878
Pre-clinical research 2,522,499
General and administration costs 2,741,877
Purchase of computer and laboratory equipment 860,001
-----------
$ 8,199,238
===========
Other than normal and recurring compensation and payments on notes payable,
there were no other payments, directly or indirectly, to any of our officers or
directors or any of their associates, or to any persons owning ten percent or
more of our outstanding common stock from the proceeds of the offering.
Unexpended proceeds are held in one financial institution and invested overnight
in obligations of the U. S. Government or its agencies. Management believes that
the Company has used, and continues to use, the net proceeds from the offering
consistent with its business strategy described in the Form SB-2 registration
statement.
9
Oragenics, Inc.
Notes to Financial Statements
(Unaudited)
3. Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded as their effect is anti-dilutive.
4. Note Payable
On February 24, 2005, the Company entered into a Business Loan Agreement
with a bank that funded approximately $615,000 of laboratory equipment
purchases. The loan has a term of 37 months with the first month's payment of
interest only and the remaining monthly payments of principal and interest of
approximately $19,000 per month. Principal payments of approximately $197,000
are due during the next twelve months. Interest is calculated at the prime rate
as published in the Wall Street Journal (6.75% at September 30, 2005) plus
1.00%. Interest can never be below 5.75% or above 17.50%. The loan is
collateralized by the equipment being 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 cannot be greater than 56% of
stockholders' equity. Thus, the Company was in compliance with these covenants
at September 30, 2005, however, because management is concerned that the Company
will not be incompliance with the new loan covenants during the fourth quarter
of 2005, the entire loan has been classified as a current liability. During the
three and nine months ended September 30, 2005, the Company incurred interest of
$10,911 and $22,566, respectively.
5. Financing Arrangement with Fusion Capital
On May 23, 2005, the Company 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 the Company
up to $9,000,000 of the Company's common stock over a 30 month period. Pursuant
to the terms of a Registration Rights Agreement, dated May 23, 2005, the Company
agreed to file a registration statement on Form SB-2 (the "Registration
Statement") with the Securities and Exchange Commission covering 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. On each
trading day during the term of the Purchase Agreement, the Company has the right
to sell to Fusion Capital $15,000 of the Company's common stock at a price based
upon the market price of the common stock on the date of each sale without any
fixed discount to the market price. At the Company's 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. The Company has the right to control the timing and the number of
shares sold to Fusion Capital. This offering was made pursuant to an
10
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended. The Company incurred costs of approximately $150,000 for
legal, accounting, stock exchange, and regulatory fees in connection with this
financing arrangement. During the three months ended September 30, 2005, the
Company sold 22,092 shares to Fusion Capital under the purchase agreement for
total proceeds of $35,000.
6. 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 believe, upon
the adoption of Statement 123(R), the impact on our results of operations or
financial position will be similar to the impact as reflected in Footnote 1
describing Stock Based Compensation.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following information should be read in conjunction with the Financial
Statements, including the notes thereto, included elsewhere in this Form 10-QSB,
and the Management's Discussion and Analysis of Financial Condition and Results
of Operations included in our 2004 Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on March 14, 2005.
Overview
We are an 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 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 are continuing to seek
additional funding and we are evaluating various strategic alternatives that may
be available to us. We currently do not have any commitments for funding or
other strategic options pending and there can be no assurances that we will be
able to obtain 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. Remaining capital resources are expected to be utilized to pay our
existing liabilities and to sustain minimal operations relating primarily to our
replacement therapy while we continue to explore opportunities to raise
additional capital. After a partial repayment of $200,000 of the outstanding
balance of our existing loan obligation in October 2005, payment of October 2005
operating costs and an expected final payment of the outstanding loan balance of
approximately $300,000 in November 2005, our remaining available capital would
be reduced to less than $150,000. Absent adequate future funding, this remaining
capital is not sufficient to enable us to continue to operate through the
remainder of 2005, 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 $50,000 on December 31, 2005 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 addresses potentially large market opportunities:
12
Replacement therapy is a single, painless one-time topical treatment
that has the potential to offer lifelong protection against dental caries
(tooth decay). The therapy is based on genetically altering the bacterium,
Streptococcus mutans, which is the primary etiologic agent in tooth decay.
Present in the normal flora of the mouth, Streptococcus mutans converts
dietary sugar to lactic acid; the lactic acid, in turn, causes the erosion
of tooth enamel that results in the destruction of the tooth surface and
eventually the entire tooth. Replacement therapy permanently replaces
resident acid-producing Streptococcus mutans with a patented, genetically
engineered strain of Streptococcus mutans that does not produce lactic
acid. Applied topically to tooth surfaces with a swab, the therapy
requires only one application. We have begun Phase I clinical trials and
expect to partner with a major healthcare products or pharmaceutical
company prior to initiating later stages of clinical testing. 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 October 31, 2005 due to the rigorous
requirements for enrollment imposed upon us by the FDA. Our efforts
regarding patient enrollment continue and upon adequate funding, we remain
committed to complete the human safety study of replacement therapy to the
satisfaction of the FDA.
Mutacin 1140 is a highly potent bactericidal peptide that is
produced by our strain of Streptococcus mutans. Our proprietary mutacin
bacteria was discovered by our researchers during the course of developing
replacement therapy and is a novel antibiotic that has broad-spectrum
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 fundings, we plan to continue to perform in vitro
antimicrobial susceptibility and genotoxicity testing during the second
half of 2005 before performing more detailed animal safety and efficacy
studies using mutacin 1140. 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.
Probiotics are live microorganisms that confer health benefits to
the host when administered in adequate amounts; the use of yogurt
containing live Lactobacillus cultures is an example of a probiotic
application. We have identified three natural strains of bacteria that
provide significant protection against the causative organisms of
periodontal disease and dental caries. Because probiotic treatments may be
marketed as "health supplements" without the need for extensive regulatory
oversight, we believe that with adequate funding, we may achieve
commercialization of our probiotic product in certain markets in 2006. We
are continuing our efforts to seek partners in Europe and Asia for market
opportunities for our oral probiotic technology. 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, a company related to us by common ownership. These
technologies enable the simple, fast identification of novel and
potentially important gene targets associated with the natural onset and
progression of infections, cancers and other diseases in humans and other
living organisms, including plants. This licensed technology offers us the
potential to generate and develop a
13
number of product candidates for future out-licensing to corporate
partners, particularly in the area of cancer and tuberculosis, as well as
agricultural and other non-human uses.
Business Objectives and Milestones
The specific goal of our business is to successfully develop, clinically
test and obtain FDA approval for sales of products based on our licensed,
patented technologies. Our strategy is to develop novel technologies through
human proof-of-concept studies (Phase I and 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. Successfully complete Phase I clinical trials.
2. Obtain FDA approval for a Phase II 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 continue the development of our technologies. We expect
the near-term focus of our capital resources to be primarily on maintaining
minimal operations while we explore additional capital raising opportunities.
The time period for the development of technologies could change depending on
the progress of our ability to negotiate a partnering arrangement, as well as
our efforts to raise additional capital.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect reported amounts and related disclosures. We consider an
accounting estimate to be critical if it requires assumptions to be made that
were uncertain at the time the estimate was made; and changes in the estimate or
different estimates that could have been made could have a material impact on
our results of operations or financial condition. Our financial statements do
not include any significant estimates that would have a material impact on our
results of operations or financial condition.
14
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 believe, upon
the adoption of Statement 123(R), the impact on our results of operations or
financial position will be similar to the impact as reflected in Footnote 1
describing Stock Based Compensation.
Results of Operations
Three Months Ended September 30, 2005 and 2004
We had no revenues in the three months ended September 30, 2005 and
revenues associated with an SBIR grant were $118,642 in the three months ended
September 30, 2004. Our operating expenses increased nominally to $750,003 in
the three months ended September 30, 2005 from $745,561 in the same period in
2004. Research and development expenses decreased approximately 16% to $479,466
in the three months ended September 30, 2005 from $567,743 in the same period in
2004. The decrease of approximately $88,000 was the result of using consultants
for regulatory affairs, preparations for clinical trials and employee recruiting
in 2004 totaling approximately $225,000 and purchasing additional supplies in
2004 in anticipation of moving to our new facility approximating $60,000, offset
by increased costs in 2005 for contract manufacturing approximating $38,000,
depreciation expense of laboratory equipment approximating $60,000, minimum
royalty payments to the University of Florida of $25,000, increased personnel
costs approximating $48,000, increased facility costs of as a result of
operating from our own facility approximately $21,000, and increased liability
insurance to cover clinical trials approximating $5,000. General and
administration expenses increased 52% to $270,537 in the three months ended
September 30, 2005 from $177,818 in the same period in 2004. The total increase
of approximately $93,000 is due to severance payments to our former CEO
approximating $48,000, costs associated with the search for a new CEO
approximating $28,000, and legal fees associated with various corporate matters
approximating $17,000.
Interest income decreased 26% to $9,742 in the three months ended
September 30, 2005 from $13,149 during the same period in 2004, reflecting the
lower cash balances being invested in 2005. We incurred interest expense of
$10,911 in the three months ended September 30, 2005 as result of interest on a
note payable to our bank. There was no interest expense in the same period in
2004 as we had no outstanding debt that incurred such charges.
We incurred net losses of $751,172 and $613,770 during the three months
ended September 30, 2005 and 2004, respectively. The increase in our net loss
amounting to $137,402 was principally caused by personnel-related expenses and
depreciation expenses on new equipment purchases to support our research
efforts.
15
Nine Months Ended September 30, 2005 and 2004
We had no revenues in the nine months ended September 30, 2005 and
revenues associated with an SBIR grant were $162,877 in the nine months ended
September 30, 2004. Our operating expenses increased 24% to $2,504,071 in the
nine months ended September 30, 2005 from $2,013,224 in the same period in 2004.
Research and development expenses increased 32% to $1,644,370 in the nine months
ended September 30, 2005 from $1,248,423 in the same period in 2004. The
increase amounting to approximately $396,000 is due to increased personnel costs
of approximately $196,000, depreciation expense of laboratory equipment
approximating $157,000, clinical trial costs of approximately $103,000, minimum
royalty payments to the University of Florida of $75,000, facility costs of
approximately $64,000 and consultant fees assisting us with our programs for
mutacin 1140 and probiotics of approximately $27,000, offset by reductions in
expenses in connection with compensation expense for options approximating
$113,000 caused by a significantly lower stock price in 2005, higher employee
recruiting costs in 2004 approximating $59,000 and higher legal fees for patent
filings approximating $54,000. General and administration expenses increased 12%
to $859,701 in the nine months ended September 30, 2005 from $764,801 in the
same period in 2004. The increase of approximately $95,000 is due to personnel
costs, including severance payments to our former CEO, approximating $130,000,
fees associated with attempted financings approximating $108,000, increased
legal and accounting fees approximating $95,000 and costs associated with the
search for a new CEO approximating $28,000, offset by reductions in expenses in
connection with compensation expense for options approximating $181,000 caused
by a significantly lower stock price in 2005, higher fees in 2004 associated
with our initial listing on the American Stock Exchange of approximately $57,000
and higher travel costs in 2004 of approximately $28,000.
Interest income increased 16% to $36,654 in the nine months ended
September 30, 2005 from $31,475 during the same period in 2004, reflecting
higher interest rates in 2005. We incurred interest expense of $22,566 in the
nine months ended September 30, 2005 as result of a note payable to our bank.
There was no interest expense in the same period in 2004 as we had no
outstanding debt that incurred interest charges.
We incurred net losses of $2,489,982 and $1,818,872 during the nine months
ended September 30, 2005 and 2004, respectively. The increase in our net loss
amounting to $671,110 was principally caused by our hiring additional personnel
and the increase in costs associated with supporting those employees, the costs
relating to financing activities including charges by our legal and accounting
professionals, the costs associated with conducting clinical trials and
performing basic research, and depreciation expenses on new equipment purchases
to support our research efforts.
Liquidity and Capital Resources
Our operating activities used cash of $2,900,228 for the nine months ended
September 30, 2005 and $1,939,828 for the nine months ended September 30, 2004.
Our working capital was $546,521 as of September 30, 2005. Cash used in
operations in the nine months ended September 30, 2005 resulted primarily from
our net loss from operations of $2,489,983 as well as an increase to prepaid
expenses of approximately $26,000, a decrease in accounts payable and accrued
expenses of approximately $186,000 and a non-cash reversal of expenses for
stock-based compensation of approximately $386,000, offset by depreciation
expenses of approximately $188,000.
Our investing activities used cash of approximately $666,000 for the nine
months ended September 30, 2005 for the acquisition of property and equipment.
We do not anticipate purchasing any property and equipment for the remainder of
2005.
16
Our financing activities provided approximately $752,000 in cash for the
nine months ended September 30, 2005, which consists of approximately $615,000
in proceeds from a note payable to our bank less approximately $94,000 in
principal payments on the note, as well as approximately $230,000 of net
proceeds from the issuance of common stock.
Because of our limited available financial resources, we have taken
further steps to reduce our expenditure of cash. During the third quarter of
2005, we curtailed hiring, froze salaries, appreciably reduced travel and
significantly decreased the use of outside consultants. We have delayed the
production of additional supplies of our replacement therapy technology to be
used in later clinical studies. Such efforts resulted in reducing operating
expenses to approximately $250,000 per month. In addition to continuing the
cost-cutting measures undertaken in the third quarter, beginning in October,
2005 three members of management are deferring 35% of their salaries and other
executives, including the former CEO and the board of directors, are deferring
their entire compensation until sufficient funding is obtained.
Our business is based on commercializing entirely new and unique
technologies, and our current business plan contains a variety of assumptions
and expectations that are subject to uncertainty, including assumptions and
expectations about manufacturing capabilities, clinical testing cost and
pricing, continuing technological improvements, strategic licensing
relationships and other relevant matters. These assumptions take into account
recent financings, as well as expected but currently unidentified additional
financings. We have experienced losses from continuing operations during the
last two fiscal years and have an accumulated deficit of $7,961,967 as of
September 30, 2005. Cash used in continuing operations for 2004 was $2,745,243
and for the first nine months of 2005 was $2,900,228. At September 30, 2005, our
principal source of liquidity was $851,514 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.
Our capital requirements during the remainder of 2005 will depend on
numerous factors, including the success of our research and development, the
resources we devote to develop and support our technologies and the success of
pursuing strategic licensing and funded product development relationships with
external partners. Subject to our ability to raise additional capital, we expect
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 September 30, 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.
17
In February, 2005, we entered into a Business Loan Agreement with a bank
that funded approximately $615,000 of laboratory equipment purchases. The loan
has a term of 37 months with the first month's payment of interest only and the
remaining monthly payments of principal and interest of approximately $19,000
per month. Interest will be calculated at the prime rate as published in the
Wall Street Journal (6.75% at September 30, 2005) plus 1.00%. Interest can never
be below 5.75% or above 17.50%. The loan is collateralized by the equipment we
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 covenant whereby debt cannot be greater than 56% of
stockholders' equity. Thus, we were in compliance with these covenants at
September 30, 2005. On October 21, 2005, we paid the bank $200,000 as a
principal reduction causing the loan balance to be reduced to approximately
$300,000. However, absent additional capital being available to us, we
anticipate that we will again be in violation of the amended loan covenants in
November 2005 and we will be required to retire the entire outstanding loan
balance at that time. If the loan had been paid off as of September 30, 2005,
our cash balance at that date would have been $330,201, not $851,514.
Also in February 2005, we entered into an agreement with an investment
advisory firm to assist in raising additional capital by acting as a financial
advisor and placement agent. No funds were raised by this undertaking, however,
the total fees paid to the underwriter was approximately $108,000. On August 31,
2005, we terminated the agreement, which allowed us to seek assistance from
other financial advisors. We are currently in discussions with other financial
advisors seeking to raise additional equity capital.
In May, 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. Pursuant to the terms of a Registration
Rights Agreement, dated May 23, 2005, we agreed to file a registration statement
on Form SB-2 (the "Registration Statement") with the Securities and Exchange
Commission covering 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. 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 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 in the event that the price of our common stock is less than $0.75. The
price of our common stock has traded below this level, and if it remains below
that level, we will not be able to sell Fusion Capital any shares of our common
stock to raise additional capital. The Company has 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, 1933, as amended. The Company incurred costs of approximately
$150,000 for legal, accounting, stock exchange, and regulatory fees in
connection with this financing arrangement. During the three months ended
September 30, 2005, the Company sold 22,092 shares to Fusion Capital under the
purchase agreement for total proceeds of $35,000. Although we have entered into
this agreement, there can be no assurance that sufficient financing will be
available through our agreement with Fusion Capital.
18
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 support our plans
going forward. Until such time as additional financing for our operations is
obtained, we expect to continue to curtail our spending. We continue to take
steps to reduce our operating costs including, but not limited to, curtailing
new hires and salary increases, deferring compensation to management personnel
and directors, limiting the use of outside consultants, appreciably reducing
travel and reducing other operating costs. While we continue to focus on our
replacement therapy technology and the completion of Phase I clinical trials, we
do not have sufficient capital resources to bring them to completion. With
limits on spending, we believe we will have cash resources to continue minimum
operations through the end of 2005. Thereafter, without sufficient capital to
fund our operations, we will be unable to continue as a going concern and will
have to cease operations.
Risk Factors Affecting Our Business
You should carefully consider the risks described below as well as the risk
factors set forth in our previously filed annual report on Form 10-KSB in the
"Risk Factors" section before making an investment decision in our securities.
All of these risks may impair our business operations. The risk factors set
forth below are the specific risk factors which have been updated to reflect
material changes to the risk factors previously disclosed in our Form 10-KSB for
the year ended December 31, 2004. The forward-looking statements in this Form
10-QSB and in the documents incorporated herein by reference involve risks and
uncertainties and actual results may differ materially from the results we
discuss in the forward-looking statements. If any of the risks described below
or in our Form 10-KSB, or any other risks and uncertainties that we have not yet
identified or that we currently believe are not material, actually occur and are
material, our business, financial condition or results of operations could be
materially adversely affected. In that case, the trading price of our stock
could decline, and you may lose all or part of your investment.
We Do Not Currently Have Sufficient Capital To Continue Operations Beyond
January 1, 2006
We have incurred annual operating losses of $3,077,888, $1,672,954 and
$699,603, respectively, during the past three fiscal years of operation. As a
result, at September 30, 2005 we had an accumulated deficit of $7,961,967. Our
revenues have not been sufficient to sustain our operations. We do not currently
have sufficient capital to sustain our operations through the remainder of 2005.
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.
19
At September 30, 2005, we had working capital of approximately $547,000.
The independent registered public accounting firm's report for the year ended
December 31, 2004, 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 $2,900,228 for the nine months ended
September 30, 2005, and have sustained operating cash flow deficits of
$2,745,243 in 2004, $1,218,910 in 2003 and $677,442 in 2002. We do not currently
have sufficient financial resources to fund our operations. Therefore, we need
additional funds to continue these operations. 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 must spend at least $1 million annually on development of our replacement
therapy and Mutacin 1140 technologies under our license agreements with the
University of Florida Research Foundation, Inc. We must also comply with certain
other conditions of our licenses. If we do not, our licenses to these
technologies may be terminated, and we may have to cease operations.
We hold our replacement therapy and Mutacin 1140 technologies under
licenses from the University of Florida Research Foundation, Inc. Under the
terms of the licenses, we must spend at least $1 million per year on development
of those technologies before the first commercial sale of products derived from
those technologies. If we do not, our licenses could be terminated. Until
commercial sales of such products take place, we will not be earning revenues
from the sale of products and will, therefore, have to raise the money we must
spend on development of our technologies by other means, such as the sale of our
common stock. There is no assurance we will be able to raise the financing
necessary to meet our obligations under our licenses. If we cannot, we may lose
our licenses to these technologies and have to cease operations.
The University of Florida Research Foundation, Inc. may terminate our
licenses in respect of our replacement therapy technology and our Mutacin 1140
technology if we breach our obligations to timely pay monies to it, submit
development reports to it or commit any other breach of the covenants contained
in the license agreement. There is no assurance that we will be able to comply
with these conditions. If 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.
We Will Require Additional Financing To Sustain Our Operations And Because Of
Our Current Stock Price Our Recent Stock Purchase Agreement with Fusion Capital
Is Currently Unable To Provide Us With Additional Capital
We only have the right to receive $15,000 per trading day under the
agreement with Fusion Capital unless our stock price equals or exceeds $2.20 in
which case the daily amount may be increased under certain conditions as the
price of our common stock increases. Fusion Capital shall neither have 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. The price of
our common stock has traded below this level, and if it remains below that
level, we will not be able to sell Fusion Capital any shares of our common stock
to raise additional capital. Since we initially registered 4,000,000 shares for
sale by Fusion Capital, the selling price of our common stock to Fusion Capital
will have to average at least $2.25 per share for us to receive the maximum
proceeds of $9,000,000 without registering additional shares of common stock.
20
We have authorized the sale and issuance of 4,000,000 shares of our common
stock to Fusion Capital under the common stock purchase agreement of which we
registered 4,000,000 shares. We estimate that the maximum number of shares we
will sell to Fusion Capital under the common stock purchase agreement will be
4,000,000 shares (exclusive of the 315,421 shares issued to Fusion Capital as
the commitment fee) assuming Fusion Capital purchases all $9.0 million of common
stock. Subject to approval by our board of directors, we have the right, but not
the obligation, to issue more than 4,000,000 shares to Fusion Capital. In the
event we elect to issue more than 4,000,000 shares offered hereby, we will be
required to file a new registration statement and have it declared effective by
the U.S. Securities & Exchange Commission.
In the event that we decide to issue more than 2,917,985 (19.99% of our
outstanding shares of common stock as of the date of our agreement), we would
first be required to seek stockholder approval in order to be in compliance with
American Stock Exchange rules. We have issued 315,421 shares to Fusion Capital
as a commitment fee and 22,092 through the daily purchase program and
accordingly may issue up to 2,580,472 shares to Fusion Capital before we would
be required to seek stockholder approval in order to be in compliance with
American Stock Exchange rules. Assuming a purchase price of $1.15 per share (the
closing sale price of the common stock on September 30, 2005) and the purchase
by Fusion Capital of 2,580,472 shares under the common stock purchase agreement,
proceeds to us would only be $2,967,543, unless we elect to sell more than
2,580,472 shares to Fusion Capital, which we have the right, but not the
obligation, to do.
The sale of shares by the selling stockholders as contemplated by the
registration statement filed by us may encourage our other shareholders to sell
their stock and have an adverse impact on the market price of our common stock,
and the sale to Fusion Capital Fund II, LLC of shares under the common stock
purchase agreement will result in dilution to our existing shareholders.
The sale of our common stock by the selling stockholders named in the
registration statement we filed as contemplated thereby will increase the number
of our publicly traded shares, which could depress the market price of our
common stock. Moreover, the mere prospect of resales by the selling stockholders
as contemplated by the registration statement could depress the market price for
our common stock. The issuance of shares to Fusion Capital under the common
stock purchase agreement will dilute the equity interest of existing
shareholders and could have an adverse effect on the market price of our common
stock.
The perceived risk of dilution may cause our shareholders to sell their
shares, which would contribute to a decline in the price of our common stock.
Moreover, the perceived risk of dilution and the resulting downward pressure on
our stock price could encourage investors to engage in short sales of our common
stock. By increasing the number of shares offered for sale, material amounts of
short-selling could further contribute to progressive price declines in our
common stock.
The sale of our common stock to Fusion Capital may cause dilution and the sale
of the shares of common stock acquired by Fusion Capital could cause the price
of our common stock to decline.
The purchase price for the common stock to be sold to Fusion Capital
pursuant to the common stock purchase agreement will fluctuate based on the
price of our common stock. All shares acquired by Fusion Capital and resold
pursuant to the 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
21
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. To the extent our stock price declines
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 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:
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
22
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 November
4, 2005 our stock price has fluctuated from $4.45 to $0.40 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.
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,
including a requirement that listed companies maintain a minimum stockholders'
equity of $2 million. At September 30, 2005, our stockholders' equity was
$1,391,223. We have received no communication from the American Stock Exchange
regarding our non-compliance.
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 receive 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.
23
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
Certain oral statements made by management from time to time and certain
statements contained herein and in documents incorporated herein by reference
that are not historical facts are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and, because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. The terms "Oragenics," "Company,"
"we," "our," and "us" refer to Oragenics, Inc. The words "expect," "believe,"
"goal," "plan," "intend," "anticipate," "estimate," "will" and similar
expressions and variations thereof if used, are intended to specifically
identify forward-looking statements. Forward-looking statements are statements
regarding the intent, belief or current expectations, estimates or projections
of Oragenics, our directors or our officers about Oragenics and the industry in
which we operate, and assumptions made by management, and include among other
items, (i) our ability to continue to meet our liquidity and financing needs;
(ii) trends affecting our financial condition or results of operations; (iii)
our financing plans and ability to control costs; (iv) our strategies regarding
growth, including our intention to develop and market our products; (v) our
ability to respond to and meet regulatory demands; and (vi) our expectation with
respect to generating revenues from our technologies. These statements are not
guarantees of future performance and are subject to a number of known and
unknown risks, uncertainties, and other factors, including those discussed above
and elsewhere in this report and those set forth under "Risk Factors Affecting
Our Business" in our 2004 Annual Report on Form 10-KSB filed with the Securities
and Exchange Commission, that could cause actual results to differ materially
from future results, performances, or achievements expressed or implied by such
forward-looking statements. Consequently, undue reliance should not be placed on
these forward-looking statements. Although we believe our expectations are based
on reasonable assumptions, we can give no assurance that the anticipated results
will occur. We undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
24
ITEM 3. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We have established and are currently maintaining disclosure controls and
procedures for our Company designed to ensure that information required to be
disclosed in our filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the required time periods specified in
the SEC's rules and forms. Our Chief Executive Officer and Chief Financial
Officer conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures and have concluded that our disclosure controls and
procedures are effective as of the end of the period covered by this report.
Changes in Internal Controls
We have also evaluated our internal controls over financial reporting, and
there have been no changes in our internal controls over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
25
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
a. During the period, we sold a total of 22,092 shares of common stock
to Fusion Capital Fund II, LLC in connection with a Common Stock
Purchase Agreement dated May 23, 2005 pursuant to an available
exemption from registration.
b. Note 2 of the Financial Statements included in Part I of this filing
of Form 10-QSB as to use of proceeds through September 30, 2005 is
hereby incorporated by reference.
c. None
ITEM 5. OTHER INFORMATION
During the period covered by this report we entered into a severance agreement
with our former Chief Executive Officer, Mento A. Soponis. Mr. Soponis resigned
his position as our Chief Executive Officer in early July 2005, however, he
remains a director of the Company. Consistent with the terms of Mr. Soponis'
employment agreement, we will continue to pay him $15,000 per month until July
6, 2006, however, due to our current financial condition severance payments
shall be deferred until such time as we are able to obtain additional capital. A
copy of the Agreement of Separation and Release is included in the as an exhibit
in the Form 10-QSB for the quarter ended June 30, 2005 that was filed on August
11, 2005 and is incorporated by reference.
Effective July 6, 2005, Dr. Robert T. Zahradnik was named acting president and
chief executive officer of the Company replacing Mento A. Soponis. Dr. Zahradnik
resigned his position on the Board of Directors in order for the Company to
comply with the American Stock Exchange's small business required ratio of at
least 50% of the board being independent board members. The Company agreed to a
compensation arrangement with Dr. Zahradnik and the material terms include
monthly compensation of $15,000, as well as medical and dental insurance and
retirement compensation consistent with the Company benefits offered to all
employees. On September 9, 2005, Dr. Zahradnik was named president and chief
executive officer of the Company, discontinuing his status as acting president
and chief executive officer. Copies of letters to Dr. Zahradnik summarizing his
employment arrangement are included as an exhibit in the Form 10-QSB for the
quarter ended June 30, 2005 that was filed on August 11, 2005 and a copy of the
press release announcing Dr. Zahradnik being permanently installed as president
and chief executive officer were filed on Form 8-K filed on September 13, 2005
and are incorporated by reference. Due to our current financial condition, Dr.
Zahradnik has agreed to defer his salary until such time as we are able to
obtain additional capital.
On October 21, 2005, the Company's bank amended certain loan covenants effective
as of September 30, 2005, thereby changing the working capital and tangible net
worth covenants to become $350,000 and amending the debt-to-equity covenant
whereby debt cannot be greater than 56% of stockholders' equity. A copy of the
Change in Terms Agreement is included in the Exhibits in Part II, Item 6.
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ITEM 6. EXHIBITS
Incorporated by Reference
----------- -------------- ---------- ------------
Exhibit Filing Filed
Number Exhibit Description Form File No Exhibit Date Herewith
10.1 Agreement of Separation and Release with
Mento A. Soponis 10-QSB 001-32188 10.1 8/11/05
10.2 Letters summarizing the employment
arrangement with Robert T. Zahradnik 10-QSB 001-32188 10.2 8/11/05
10.3 Business Loan Agreement, Collateral
Security Agreement and Promissory Note
between the Company and Merchants and
Southern Bank dated February 24, 2005 10-QSB 001-32188 4.8 8/11/05
10.4 Change in Terms Agreement between Merchants
& Southern Bank and the Company dated
October 24, 2005 the Business Loan
Agreement and cover letter from Merchants &
Southern Bank dated October 20, 2005 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
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on this 7th day of November, 2005.
ORAGENICS, INC.
BY: /s/ Robert T. Zahradnik
Robert T. Zahradnik, Acting President and
Principal Executive Officer
BY: /s/ Paul A. Hassie
Paul A. Hassie, Secretary, Treasurer,
Principal Accounting Officer and
Principal Financial Officer
28