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FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006.
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the
transition period from ________ to __________
COMMISSION FILE NUMBER: 000-50614
ORAGENICS, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-3410522
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13700 PROGRESS BOULEVARD
ALACHUA, FLORIDA 32653
(Address of principal executive offices)
(386) 418-4018
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
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 May 1, 2006, there were 19,656,367 shares of Common Stock, $.001 par
value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 2006 (unaudited)
and December 31, 2005 3
Statements of Operations for the Three Months ended
March 31, 2006 and 2005 (unaudited) 4
Statements of Cash Flows for the Three Months ended
March 31, 2006 and 2005 (unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 8
Item 3. Controls and Procedures 29
PART II - OTHER INFORMATION
Item 2. Recent Sales of Unregistered Securities 30
Item 6. Exhibits 30
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORAGENICS, INC.
BALANCE SHEETS
MARCH 31, 2006 DECEMBER 31, 2005
------------------------- -----------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 725,531 $ 937,789
Prepaid expenses and other current assets 156,145 112,047
------------------------- -----------------------
Total current assets 881,676 1,049,836
Property and equipment, net 1,024,363 1,096,564
------------------------- -----------------------
Total assets $ 1,906,039 $ 2,146,400
========================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 252,855 $ 281,830
Deferred compensation 115,500 93,000
------------------------- -----------------------
Total current liabilities 368,355 374,830
Stockholders' equity:
Preferred stock, no par value; 20,000,000 shares authorized;
none issued and outstanding at March 31, 2006 and December
31, 2005 - -
Common stock, $0.001 par value; 100,000,000 shares authorized;
19,646,117 and 18,146,117 shares issued and outstanding at
March 31, 2006 and December 31, 2005, respectively 19,646 18,146
Additional paid-in-capital 11,097,789 10,476,786
Accumulated deficit (9,579,751) (8,723,362)
------------------------- -----------------------
Total stockholders' equity 1,537,684 1,771,570
------------------------- -----------------------
Total liabilities and stockholders' equity $ 1,906,039 $ 2,146,400
========================= =======================
See accompanying notes.
3
ORAGENICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-------------------------------------------------
2006 2005
------------------------- ----------------------
Revenue $ - $ -
Operating expenses:
Research and development 500,285 647,186
General and administration 364,846 231,919
------------------------- ----------------------
Total operating expenses 865,131 879,105
------------------------- ----------------------
Loss from operations (865,131) (879,105)
Other income (expense):
Interest income 7,359 14,620
Interest expense (641) (1,645)
Gain on sale of property and equipment 2,024 -
------------------------- ----------------------
Total other income (expense), net 8,742 12,975
------------------------- ----------------------
Net loss $ (856,389) $ (866,130)
========================= ======================
Basic and diluted net loss per share $ (0.05) $ (0.06)
========================= ======================
Shares used to compute basic and diluted net loss
per share 18,562,784 14,596,866
========================= ======================
See accompanying notes.
4
ORAGENICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
------------------------------------------------------------
2006 2005
-------------------------- --------------------------
OPERATING ACTIVITIES
Net loss $ (856,389) $ (866,130)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 70,765 48,803
Gain on sale of property and equipment (2,024)
Stock-based compensation credit resulting from variable
accounting - (213,102)
Stock-based compensation expense resulting from fair value
based method 98,199 -
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (44,098) (100,123)
Accounts payable and accrued expenses (28,975) (152,083)
Deferred compensation 22,500 -
-------------------------- --------------------------
Net cash used in operating activities (740,022) (1,282,635)
INVESTING ACTIVITIES
Purchases of property and equipment (1,540) (561,462)
Proceeds from sale of property and equipment 5,000 -
-------------------------- --------------------------
Net cash provided by (used in) investing activities 3,460 (561,462)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 524,304 2,875
Proceeds from note payable - 556,361
-------------------------- --------------------------
Net cash provided by financing activities 524,304 559,236
-------------------------- --------------------------
Net decrease in cash and cash equivalents (212,258) (1,284,861)
Cash and cash equivalents at beginning of period 937,789 3,666,244
-------------------------- --------------------------
Cash and cash equivalents at end of period $ 725,531 $ 2,381,383
========================== ==========================
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. The Company is dedicated to developing technologies associated with
oral health, broad spectrum antibiotics and general health benefits.
Basis of Presentation
The accompanying unaudited condensed financial statements as of and for
the three months ended March 31, 2006 and 2005 have been prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP) for interim financial information and with the instructions to Form
10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the accompanying financial statements
include all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the financial condition, results of operations and cash
flows for the periods presented. The results of operations for the interim
period March 31, 2006 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2006 or any future period.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 2005
which are included in our Annual Report on Form 10-KSB/A filed with the
Securities and Exchange Commission on March 23, 2006. In that report the Company
disclosed that it expects to incur substantial expenditures to further develop
each of its technologies. It further stated that it believed its working capital
will be insufficient to meet the business objectives as presently structured and
without sufficient capital to fund its operations, the Company will be unable to
continue as a going concern. 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 to the fair value based method of
accounting for stock-based employee compensation which is required beginning
January 1, 2006. The Company has elected to adopt the Modified Prospective
Method. This method requires the Company to prospectively expense all new grants
and unvested pre-adoption grants. It also entails a pro forma presentation for
comparative prior periods shown disclosing the effect of the new method had it
been adopted earlier when the Company employed the use of the intrinsic value
method of accounting as prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees. The following table provides the
required pro forma disclosure for the three months ended March 31, 2005:
Net loss, as reported $ (866,130)
Less: Effect of stock-based employee compensation expense
(credit) included in reported net loss (213,102)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards (58,455)
--------------
$ (1,137,687)
Pro forma net loss
==============
Net loss per share:
Basic and diluted --as reported $ (0.06)
==============
Basic and diluted --pro forma $ (0.08)
==============
Shares used to compute basic and diluted net loss per
share 14,596,866
==============
2. 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.
7
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 2005 Annual Report on Form 10-KSB/A filed with the
Securities and Exchange Commission on March 23, 2006. 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-QSB.
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. 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. Since
September 2005, 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, 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 while we continue to explore opportunities to raise additional
capital. Absent adequate future funding, our remaining available working capital
as March 31, 2006 of $513,321 is not sufficient to enable us to continue to
operate through the third 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 quarterly and spend or cause to
be spent an aggregate of $1,000,000 annually toward research, development and
regulatory prosecution, in order to maintain our license with the University of
Florida Research Foundation, Inc. for SMaRT Replacement Therapy(TM) and MU
1140(TM) (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:
8
SMART 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. SMaRT
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 was filed with the FDA on March 9,
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 SMaRT Replacement Therapy to the satisfaction of the
FDA and we expect the cost in 2006 will be approximately $350,000.
MU 1140 (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 SMaRT
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 MU 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 MU 1140.
Upon successful completion of this preclinical testing and the animal
studies we would then be positioned to file an IND.
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 (PROBIORA3(TM)) 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. Having
received independent review board approval in April 2006, we initiated a
human trial in May 2006 to support product claims for Probiora 3. While
there can be no assurances, this study should be completed during the
third quarter of 2006. If successfully developed, ProBiora3 will be one of
the first probiotics to be marketed for the maintenance of oral health.
9
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. 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
agreements 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.
LPT3-04 is a small molecule anti-obesity agent for which we filed a
U.S. patent application on April 5, 2006 to protect our intellectual
property rights to the agent and its analogs. As a natural substance,
LPT3-04 is orally available and the Company believes it has an excellent
safety and tolerability profile. While we are optimistic about the future
prospects for this small molecule, we are in the preliminary discovery
stage of this research and development. There can be no assurance that a
patent will be issued or that new technology will be successfully
developed by us. Although we intend to continue development of this
proprietary technology, we currently do not have sufficient capital
resources to do so. We are seeking a commercial partner that is actively
involved in anti-obesity therapeutics.
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:
10
SMART REPLACEMENT THERAPY
1. Initiate second Phase I clinical safety trial. MU 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. PROBIORA3
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
periods for the development of our technologies have been extended due to our
insufficient capital position and could change in the future depending on the
progress of our ability to negotiate a partnering arrangement, as well as our
efforts to raise additional capital. Our available working capital is not
sufficient to enable us to operate through the third quarter of 2006, at which
time we will need to cease all operations until we are able to raise additional
capital. 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
SMaRT Replacement Therapy and MU 1140 technologies. If we are unable to make
these payments, our license could be terminated which will substantially
diminish the value of our company.
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 of
America. The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America 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.
11
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 have adopted in the first quarter of 2006, is generally similar
to Statement 123, however, it requires 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 for new stock option grants
and unvested stock option grants prior to adoption of FAS 123(R).
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
We had no revenues in the three months ended March 31, 2006 and 2005. Our
operating expenses decreased 2% to $865,131 in the three months ended March 31,
2006 from $879,105 in the same period in 2005. Research and development expenses
decreased 23% to $500,285 in the three months ended March 31, 2006 from $647,186
in the same period in 2005, reflected by staffing reductions and the resultant
decrease in supplies totaling approximately $130,000 and the decreased use of
outside consultants for research, development, clinical trials and contract
manufacturing totaling approximately $232,000, offset by the recognition of
stock option expense resulting from the adoption of FAS 123(R) and the
recognition of credits in 2004 for the variable accounting for stock option
awards aggregating $146,000, an increase in patent filing costs in 2005 of
approximately $47,000, and increased depreciation expense of approximately
$22,000 associated with additional equipment purchased subsequent to March 31,
2005. General and administration expenses increased 57% to $364,846 in the three
months ended March 31, 2006 from $231,919 in the same period in 2005, reflecting
the recognition of stock option expense resulting from the adoption of FAS
123(R) and the recognition of credits in 2004 for the variable accounting for
stock option awards aggregating $165,000 and severance charges of $45,000 to a
former officer, offset by the reduction in investor relations consulting fees of
$24,000 and other professional service fees of $11,000, reduced staffing
amounting to approximately $27,000, lower directors' and officers' liability
insurance premiums of approximately $9,000 and a reduction to travel related
costs of approximately $6,000.
Interest income decreased 50% to $7,359 in the three months ended March
31, 2006 from $14,620 during the same period in 2005, reflecting the higher
average cash balances maintained during most of the quarterly period in 2005. We
incurred interest expense of $641 in the first three months of 2006, as compared
to $1,645 in the same period in 2005. Interest expense in 2006 related to
financing of insurance premiums, whereas the expense in 2005 was the result of
the initial draw on a note payable to our bank of approximately $229,500 on
February 24, 2005. The note was repaid in December 2005 and we had no
outstanding bank debt during the three months ended March 31, 2006.
We incurred net losses of $856,389 and $866,130 during the three months
ended March 31, 2006 and 2005, respectively. The decrease in our net loss of
$9,741 was principally caused by the decreased use of outside professional
consultants totaling approximately $220,000 and reductions in personnel netting
approximately $112,000 and lower insurance premiums and travel costs of
approximately $15,000, offset by the recognition of credits in 2004 for the
variable accounting for stock option awards approximating $213,000, the
recognition of stock option expense resulting from the adoption of FAS 123(R) in
2006 approximating $98,000, and increased depreciation expense in 2005 of
approximately $22,000 and reduced interest income of approximately $7,000 as a
result of maintaining lower cash balances in 2006.
LIQUIDITY AND CAPITAL RESOURCES
Our operating activities used cash of $737,999 for the three months ended
March 31, 2006 and $1,282,635 for the three months ended March 31, 2005. Our
working capital was $513,321 as of March 31, 2006. Cash used by operations in
the three months ended March 31, 2006 resulted primarily from our net loss from
operations of $856,389.
13
Our investing activities provided cash of $1,437 for the three months
ended March 31, 2006 as a result of the sale of property and equipment. We do
not anticipate any significant spending on additional property and equipment
during the remainder of 2006.
Our financing activities for the three months ended March 31, 2006
provided net cash of $524,304, which consists of $600,000 in gross proceeds from
a private financing less costs of $75,696. On March 6, 2006, we issued 1,500,000
shares of our common stock at $0.40 per share and warrants to purchase 1,500,000
shares of our common stock in a private placement to accredited investors. 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.
During the remainder of 2006, provided additional financing is obtained,
we expect to spend approximately $1,400,000 to maintain normal research and
development operations and approximately $150,000 to perform additional studies
on ProBiora3(TM) and MU 1140(TM) and approximately $500,000 to continue our
Phase I SMaRT Replacement Therapy clinical trial.
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 $9,579,751 as of March
31, 2006. Cash used in continuing operations for 2005 was $3,434,382 and for the
first three months of 2006 was $737,999. At March 31, 2006, our principal source
of liquidity was $725,531 of cash and cash equivalents. These operating results
occurred while developing and attempting to commercialize and manufacture
products from entirely new and unique technologies. Our business plan requires
significant spending related primarily to clinical testing expenditures. These
factors place a significant strain on our limited financial resources and
adversely affect our ability to continue as a going concern. Our ultimate
success depends on our ability to continue to raise capital for our operations.
Because of our limited available financial resources, we have continued to
adopt several approaches to reduce expenditures including curtailing new hires,
freezing salaries, reducing 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 SMaRT Replacement Therapy technology to be used in later clinical
studies. As of March 31, 2006, we also deferred salary payments of $26,250 each
to Jeffrey Hillman, our Chief Scientific Officer, and Robert Zahradnik, our
President & Chief Executive Officer, and $14,500 in fees payable to directors.
These salary payments and meeting fees 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 March 31, 2006, 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 $63,000 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.
14
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 March 31, 2006 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 SMaRT
Replacement Therapy technology, conducting additional studies for our MU 1140
antibiotic technology and ProBiora3, and developing strategic partners for
ProBiora3, 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.
15
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision in our securities. All of these risks may impair our
business operations. The risk factors set forth below were previously disclosed
in our Form 10-KSB for the year ended December 31, 2005 and where applicable
have been updated to provide information as of a more recent date. If any of the
risks described below or in our filings, 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.
RISKS ASSOCIATED WITH OUR COMPANY
WE CONTINUE TO REQUIRE ADDITIONAL FINANCING TO OPERATE THROUGH THE REMAINDER OF
THE YEAR.
We do not currently expect to have sufficient capital to sustain our operations
beyond the third quarter of 2006 and we will require additional financing as
soon as possible. 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 be unable to pursue patenting on small molecule anti-obesity
agent and development of our technologies and products;
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 SMaRT Replacement Therapy technology and MU
1140 technology could be terminated which would significantly harm
our business.
At March 31, 2006 and December 31, 2005, we had working capital of
approximately $513,000 and $675,000, respectively. 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 $737,999 for the three months ended March 31, 2006 and have sustained
operating cash flow deficits of $3,434,382 in 2005 and $2,745,243 in 2004. 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 FORESEEABLEFUTURE.
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 SMaRT Replacement Therapy, ProBiora3, MU 1140 and other
technologies we license and own. No assurances can be given when this will occur
or that we will ever be profitable.
16
WE MUST SPEND AT LEAST $1 MILLION ANNUALLY ON DEVELOPMENT OF OUR SMART
REPLACEMENT THERAPY AND MU 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 AND OTHER TECHNOLOGIES MAY BE
TERMINATED, AND WE MAY HAVE TO CEASE OPERATIONS.
We hold our SMaRT Replacement Therapy and MU 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. The University of Florida Research Foundation, Inc. may
terminate our licenses in respect of our SMaRT Replacement Therapy technology
and our MU 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 SMaRT Replacement Therapy and MU1140 technologies will become
valueless and we may have to cease operations.
We also hold a license for our IVIAT and CMAT technologies from iviGene
Corporation, which requires us to either fund two full time resources or invest
$200,000 annually toward development of these technologies. 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.
During 2005, we did not meet the maintain our obligations under the license,
however, iviGene issued a waiver for non-compliance. In the future, 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.
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.
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 SMaRT Replacement Therapy technology has been granted clearance
to begin Phase 1 human clinical trials by the FDA. Clinical trials on our SMaRT
Replacement Therapy are expected to take several 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 SMaRT Replacement Therapy or fail to
obtain FDA clearance for our other technologies, we may have to cease
operations.
17
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 stage.
Although we have current data which indicates the promise of the concept of our
SMaRT Replacement Therapy and MU 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 SMaRT Replacement
Therapy and MU 1140 technologies are based may also fail due to flaws or
inaccuracies on which the data are based, or because the data are totally or
partially incorrect, or not predictive of future results. If our science proves
to be flawed, incorrect or otherwise fails, we will not be able to create a
marketable product or generate revenues and we may have to cease operations.
THE SUCCESS OF OUR RESEARCH AND DEVELOPMENT ACTIVITIES IS UNCERTAIN. IF THEY DO
NOT SUCCEED, WE WILL BE UNABLE TO GENERATE REVENUES FROM OUR OPERATIONS AND WE
WILL HAVE TO CEASE DOING BUSINESS.
We intend to continue with research and development of our technologies
for the purpose of 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.
18
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 an
employment agreement with Dr. Hillman, which automatically renews for one-year
terms unless 90 days written notice is given by either party.
Our future success also depends on our ability to identify, attract, hire,
train, retain and motivate highly skilled technical, managerial and research
personnel. If we fail to attract, integrate and retain the necessary personnel,
our ability to maintain and build our business could suffer significantly.
IT IS POSSIBLE THAT OUR SMART REPLACEMENT THERAPY AND PROBIORA3 TECHNOLOGIES
WILL BE LESS EFFECTIVE IN HUMANS THAN THEY HAVE BEEN SHOWN TO BE IN ANIMALS. IT
IS POSSIBLE OUR MU 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 SMaRT 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 SMaRT 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 ProBiora3 has been undertaken solely in
animals. Those studies have shown our technology to be effective at helping to
reduce certain bacteria that are believed to cause periodontal disease. It is
possible that ProBiora3 will not be effective in reducing those bacteria and
will not improve periodontal health. If ProBiora3 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.
19
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.
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.
20
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.
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.
Their notification did not state that they intended to pursue legal remedies.
Our management does not believe the gene in question infringes that patent. We
have sent them correspondence setting out our position and we have not heard
anything further from them. If necessary, we 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.
21
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.
22
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 SMaRT Replacement Therapy, ProBiora3, MU
1140 and other 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.
23
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, 2007.
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 May 1, 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.
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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:
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 in June 2003 and
through May 1, 2006 our stock price has fluctuated from $5.00 to $0.34 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.
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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
May 1, 2006, there were 19,656,367 shares of our common stock outstanding, with
another 4,754,750 shares of common stock issuable upon exercise of warrants to
investors and underwriters, 1,125,000 shares issuable upon exercise of options
issued and an additional 375,000 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 May 1, 2006, we had approximately 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
remaining shares are subject to release from escrow 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 May 1, 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 or we are unable to raise additional capital to continue
operations.
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:
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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.
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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.
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ITEM 3. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
We have established and are currently maintaining disclosure controls and
procedures for our Company designed to ensure that information required to be
disclosed in our filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the required time periods specified in
the SEC's rules and forms. Our Chief Executive Officer and Chief Financial
Officer conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures and have concluded that our disclosure controls and
procedures are effective as of the end of the period covered by this report.
CHANGES IN INTERNAL CONTROLS
We have also evaluated our internal controls over financial reporting, and
there have been no changes in our internal controls over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
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PART II - OTHER INFORMATION
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
a. On March 11, 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. We received gross proceeds of
$600,000 in the private placement and incurred estimated costs of $75,696
resulting in net proceeds of approximately $524,304. 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.
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.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION FORM FILE NO EXHIBIT FILING DATE FILED HEREWITH
4.1 Securities Purchase Agreement, dated January 6, 8-K 000-50614 4.1 3/10/06
2006 among the purchasers and Oragenics, Inc.
4.2 Registration Rights Agreement dated January 6, 8-K 000-50614 4.2 3/10/06
2006 among the purchasers and Oragenics, Inc.
4.3 Specimen Warrant Agreement 8-K 000-50614 4.3 3/10/06
31.1 Certification of Principal Executive Officer X
pursuant to Rule 13a-14 and Rule 15d-14(a),
promulgated under the
Securities and Exchange Act of 1934, as amended.
31.2 Certification of Principal Financial Officer X
pursuant to Rule 13a-14 and Rule 15d-14(a),
promulgated under the Securities and Exchange
Act of 1934, as amended.
32.1 Certification pursuant to 18 U.S.C. Section X
1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act
of 2002 (Chief Executive Officer).
32.2 Certification pursuant to 18 U.S.C. Section X
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act
of 2002 (Chief Financial Officer).
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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 2nd day of May, 2006.
ORAGENICS, INC.
BY: /s/ Robert T. Zahradnik
Robert T. Zahradnik, President and
Principal Executive Officer
BY: /s/ Paul A. Hassie
Paul A. Hassie, Secretary, Treasurer,
Principal Accounting Officer and
Principal Financial Officer
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