Liquidity and Capital Resources
Since
our inception, we have funded our operations through the sale of equity securities in private placements and our initial public offering, the sale of equity securities and warrants in private placements, debt financings and grants. So far in 2008,
the Company has been awarded a $500,000 NSF Phase II grant for its DPOLT technology and has completed two security events whereby 4,536,364 warrants were exercised for common stock that provided $1,996,000 in proceeds. Below is a summary of the
Companys cash flow activities for 2007.
Our operating activities used cash of $1,913,760 for the year ended December 31, 2007
and $2,224,538 for the year ended December 31, 2006. Our working capital was $260,534 as of December 31, 2007. Cash used by operations in the year ended December 31, 2007 resulted primarily from operating losses from operations of
$2,340,139.
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Our investing activities used cash of $9,860 for the year ended December 31, 2007 as a result for
the acquisition of laboratory equipment. We do not anticipate any significant spending on additional property and equipment during 2008.
Our financing activities provided $1,691,850 in cash for the year ended December 31, 2007, which came from three sources. In the third quarter of 2007 we issued 4,600,000 common stock and warrants in a private placement in August 2007
that provided gross proceeds of $1,171,591. In addition, common stock warrants issued in connection with two private placements in December 2005 and March 2006 were also exercised during the first six months of 2007 providing funds of approximately
$478,500. Additional details of these financings are provided below:
Private Placement, August,
2007
On August 7, 2007, we closed on $1,171,591 in equity based financing. We issued a total of 4,600,000 shares of restricted common stock and warrants to acquire 4,600,000 shares of common stock in a private placement to
accredited investors. The shares were sold to accredited investors at $0.25 per share, except that per AMEX requirements, our CEO, Dr. Ronald Evens acquired his shares at $0.44 per share, which was the closing share price on August 7,
2007. Each warrant to purchase shares of common stock is exerciseable at the price of $0.58 per share. The warrants expire on August 8, 2008 (the August 2007 Warrants). On January 31, 2008 we amended the August 2007 Warrants,
to reduce the exercise price to $0.44, which was the fair market value on the date of the amendment for a designated period of time (from January 28, 2008 to February 29, 2008) following which the exercise price reverts back to $0.58.
Prior to the expiration of the August 2007 Warrants, 3,386,364 were issued upon exercise at the amended exercise price resulting in additional working capital proceeds to us of $1,490,000.
Private Placement, March 2006
On March 6, 2006, we issued a total of 1,500,000 shares of our common stock and
warrants to purchase 1,500,000 shares of our common stock in a private placement to accredited investors. We received gross proceeds of $600,000 in the private placement and incurred estimated costs of approximately $75,000 resulting in net proceeds
of approximately $525,000. Each warrant is exercisable on or before February 8, 2008 to acquire one share of common stock at a price of $0.60 per share (the March 2006 Warrants). On January 17, 2008 we amended the March 2006
Warrants. Pursuant to the amendment, the warrant exercise price was reduced to $0.44, which was the fair market value on the date of the amendment. Prior to the expiration of the March 2006 Warrants, 1,150,000 were issued upon exercise at the
amended exercise price resulting in additional working capital proceeds to us of $506,000. The remaining unexercised March 2006 Warrants expired and are no longer outstanding
Private Placement, December 2005
On December 14, 2005, we issued a total of 2,937,500 shares of our common stock and
warrants to purchase 2,937,500 shares of our common stock in a private placement to accredited investors. The issuance of the shares of common stock and warrants was made pursuant to the exemptions from registration provided by Section 4(2) of
the Securities Act and Regulation D promulgated thereunder. We received gross proceeds of $1,175,000 in the private placement and incurred estimated costs of approximately $70,000 resulting in net proceeds of approximately $1,105,000. The warrants
representing shares of common stock were exercisable by the accredited investors at any time over a two-year period at an exercise price of $0.60 per share. On January 16, 2007, we called all outstanding warrants associated with our December,
2005 private placement pursuant to the terms of the warrant. A total of 1,387,500 warrants were exercised that provided $832,500 in additional working capital and following the call of the warrants no further warrants associated with the private
placement remains outstanding.
Our business is based on commercializing entirely new and unique technologies, and our current business
plan contains a variety of assumptions and expectations that are subject to uncertainty, including assumptions and expectations about manufacturing capabilities, clinical testing cost and pricing, continuing technological improvements, strategic
licensing relationships and other relevant matters. These assumptions take into account recent financings, as well as expected but currently unidentified additional financings. We have experienced losses from operations during the last three fiscal
years and have an accumulated deficit of $13,970,793 as of December 31, 2007. Cash used in
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operations for 2007, 2006 and 2005 was $1,913,760, $2,224,538 and $3,434,382, respectively. At December 31, 2007, our principal source of liquidity was
$475,508 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.
Because of our limited available financial resources, we have
continued to adopt several approaches to reduce expenditures by reducing our matching contributions for the employee retirement plan, appreciably reducing travel and other operating costs, decreasing the use of outside consultants and delaying the
production of additional supplies of our SMaRT Replacement Therapy technology to be used in later clinical studies. As of December 31, 2007, salary payments of $26,250 each to Jeffrey D. Hillman, our Chief Scientific Officer, and Robert
T. Zahradnik, our former President and Chief Executive Officer and 2005 and 2006 fees of $34,000 to the Board of Directors and Audit Committee have been deferred. 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. The deferrals of payments to our former chief executive
officer, current officers and directors, do not reduce our expenses, but serve to preserve our limited cash resources to the extent necessary to maintain our operations.
Our capital requirements for 2008 will depend on numerous factors, including the success of our research and development, the resources we devote to develop and support our technologies and the success of pursuing
strategic licensing and funded product development relationships with external partners. Subject to our ability to raise additional capital, we expect to need to incur substantial expenditures to further develop each of our technologies including
continued increases in costs related to research, preclinical testing and clinical studies, as well as significant costs associated with being a public company. Our working capital at December 31, 2007 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 LPT3-04, and developing strategic partners for Probiora3 and LPT3-04, we do not have sufficient capital resources to complete these projects. As we move into more advanced stages concerning our products and their testing our monthly budget and
of cash usage rate is likely to increase accordingly. Our available working capital at December 31, 2007 is $260,534. Our currently available working capital is insufficient to enable us to continue to operate after the first quarter of 2008.
Because we were recently awarded a NSF SBIR Phase II grant on February 15, 2008, we believe additional capital may be possible through our arrangement with Fusion Capital or through possible future exercises of outstanding warrants, there can
be no assurance of the same. In the event adequate capital is not raised we would likely need to cease all operations until we are able to raise additional capital. Thereafter, without sufficient capital to fund our operations, we will be unable to
continue as a going concern and will have to cease operations.
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RISK FACTORS
You should carefully consider the risks described below before making an investment decision in our securities. These risk factors are effective as of the date of this Form 10-KSB and shall be deemed to be modified
or superseded to the extent that a statement contained in our future filings incorporated herein by reference modifies or replaces such statement. All of these risks may impair our business operations. The forward-looking statements in this Form
10-KSB and in the documents incorporated herein by reference involve risks and uncertainties and actual results may differ materially from the results we discuss in the forward-looking statements. If any of the following risks actually occur, our
business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our stock could decline, and you may lose all or part of your investment.
Risks Associated with Our Company
We continue to require
additional financing to operate through the remainder of the year
We do not have sufficient capital to sustain our operations beyond the first
quarter of 2008 and we will require additional financing as soon as possible. If we are not able to raise additional capital, among other things:
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We will need to cease operations and be unable to pursue further development of our technologies;
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We will be unable to pursue patenting our small molecule weight loss agent and development of our technologies and products;
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We will have to lay-off our personnel;
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We could be unable to continue to make public filings;
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We will be de-listed from the American Stock Exchange; and
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Our licenses for our SMaRT Replacement Therapy technology and MU 1140 technology could be terminated which would significantly harm our business.
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At December 31, 2007 and December 31, 2006, we had working capital of approximately $260,534 and $453,576,
respectively. The independent registered public accounting firms report as of and for the year ended December 31, 2006, 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 $1,913,760 for the year ended December 31, 2007 and have sustained operating cash flow deficits of $2,224,538 in
2006. Our ability to obtain additional funding will determine our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have a limited operating history with significant losses and expect losses to continue for the foreseeable future.
We have yet to establish any history of profitable operations. Our limited revenues to date have not been related to the commercialization or licensing of
our products and have not been sufficient to sustain our operations. We expect that our revenues will not be sufficient to sustain our operations for the foreseeable future. Our profitability will require the successful commercialization of our MU
1140, SMaRT Replacement Therapy, Probiora3 and other technologies we either license or own. No assurances can be given when this will occur or that we will ever be profitable.
Our ability to obtain additional financing from Fusion Capital is subject to certain conditions and limitations which could cause us to be unable to obtain such additional financing.
The extent we are able to rely on our stock purchase agreement with Fusion Capital as a source of funding will depend on a number of factors, conditions
and limitations beyond our control including, the prevailing market price of our common stock. Specifically, Fusion Capital shall not 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. If obtaining sufficient financing from Fusion Capital were to prove unavailable or prohibitively dilutive and if we are unable to commercialize and sell products resulting from the development of our
technologies, we will need to
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secure another source of funding in order to satisfy our working capital needs. Even if we are able to access the full $9.0 million under the common stock
purchase agreement with Fusion Capital, we may still need additional capital to fully implement our business, operating and development plans. Should the financing we require to sustain our working capital needs be unavailable or prohibitively
expensive when we require it, the consequences would be a material adverse effect on our business, operating results, financial condition and prospects.
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 not 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.
We have authorized the sale and issuance of up to 4,000,000 shares of our common stock to Fusion Capital under the common stock purchase agreement. In
the event that we decide to issue more than approximately 2,900,000 shares, 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 205,732 shares pursuant to the common stock purchase agreement and accordingly may issue up to 2,378,847 shares to Fusion Capital before we would be required to seek stockholder approval in order to be in compliance with American
Stock Exchange rules.
We are required to maintain an effective registration statement in connection with the shares acquired by Fusion
Capital pursuant to the stock purchase agreement.
We must spend at least $1 million annually on development of our MU 1140 and SMaRT Replacement
Therapy 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 MU 1140 and SMaRT Replacement
Therapy and 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 MU 1140 and our SMaRT Replacement Therapy technology and 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 MU 1140 technologies will
become valueless and we may have to cease operations.
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 drug technologies have not been cleared for testing in humans. Our drug 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 drug 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 drug technologies. There is a possibility that our technologies may be found to be unsafe or ineffective or
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otherwise fail to satisfy regulatory requirements. If we are unable to resolve the FDAs 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 drug technologies, we may have to cease operations.
Our product candidates are in the early 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
early development stage. Although we have current data which indicates the promise of the concept of our MU 1140, SMaRT Replacement Therapy, Probiora3, and LPT3-04 technologies, we can offer 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 MU 1140,
SMaRT Replacement Therapy, Probiora3, and LPT3-04 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 for 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, subject to available funding, that 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 funding or revenue from operations to do so.
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 sub licensees to compete effectively in product development areas such as, but not limited to, drug safety, efficacy, ease of use, patient or customer
compliance, price, marketing and distribution. There can be no assurance that competitors will not succeed in developing products that are more effective than the products developed from our technologies or that would render our products obsolete
and non-competitive.
We rely on the significant experience and specialized expertise of our senior management and must retain and attract qualified
scientists and other highly skilled personnel in a highly competitive job environment to maintain and grow our business.
Our
performance is substantially dependent on the continued services and on the performance of our senior management and our team of research scientists, who have the experience and specialized expertise in our business. Our performance also depends on
our ability to retain and motivate our other key employees. The loss of the services of our Chief Scientific Officer, Dr. Jeffrey D. Hillman, and any 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.
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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 technology will be less effective in humans than it has 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 and a limited number of
humans. 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 the antibiotic
substance, MU1140 has been undertaken solely in the laboratory and in animals. We have not yet conducted human studies of MU1140. It is possible that when these studies are conducted, they will show that MU1140 is ineffective or harmful. If MU1140
is shown to be ineffective or harmful, we will be unable to commercialize it and generate revenues from sales of MU1140. 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 MU1140 in large-scale commercial quantities. If we cannot, we will be unable to generate revenues from
product sales, and we may have to cease operations.
Our antibiotic technology, MU1140, 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 MU1140 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 or the DPOLT synthetic chemistry methodology to allow large-scale commercial production of the antibiotic. However, these
methodologies may not be feasible for cost effective, large-scale manufacture of the MU1140 antibiotic. If we are not able to optimize either of these methodologies, we will be unable to generate revenues from this technology and we may have to
cease operations.
If clinical trials for our product candidates are unsuccessful or delayed, we will be unable to meet our anticipated development
and commercialization timelines, which could cause our stock price to decline and we may have to cease operations.
Before obtaining
regulatory approvals for the commercial sale of any drug 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:
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lack of efficacy during the clinical trials;
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unforeseen safety issues;
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slower than expected patient recruitment; and
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government or regulatory delays.
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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.
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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 sub-licensees will pay the costs of any remaining clinical trials, and manufacturing and marketing of our technologies. If we are unable to sublicense our technologies, we will have to pay for the costs of Phase II and III trials and new
drug applications to the FDA ourselves. We would also have to set up our own manufacturing facilities and find our own distribution channels. This would greatly increase our future capital requirements and we cannot be assured we would be able to
obtain the necessary financing. If we cannot obtain financing, we may have to cease operations.
If our expected collaborative partnerships do not
materialize or fail to perform as expected, we will be unable to develop our products as anticipated.
We expect to enter into
collaborative arrangements with third parties to develop certain products by sublicensing our technologies to strategic partners. We cannot assure you that we will be able to enter into these collaborations or that, if entered, they will produce
successful products. If we fail to maintain our existing collaborative arrangements or fail to enter into additional collaborative arrangements, the number of products from which we could receive future revenues would decline.
Our dependence on collaborative arrangements with third parties subjects us to a number of risks. These collaborative arrangements may not be on terms
favorable to us. Agreements with collaborative partners typically allow partners significant discretion in electing whether or not to pursue any of the planned activities. We cannot control the amount and timing of resources our collaborative
partners may devote to products based on the collaboration, and our partners may choose to pursue alternative products. Our partners may not perform their obligations as expected. Business combinations or significant changes in a collaborative
partners business strategy may adversely affect a partners 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
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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 Celunol (formerly 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. On September 17, 2006, Celunol notified Oragenics regarding the possibility of sublicenses to date. As of this date, no
further communication has been received from Celunol. 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. 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 Celunol and/or we could owe substantial damages. On February 12, 2007 Celunol and the Diversa Corporation
announced that they had signed a definitive merger agreement.
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.
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From time to time, legislative or regulatory proposals are introduced that could alter the review and
approval process relating to our technologies. It is possible that the FDA will issue additional regulations further restricting the sale of our proposed products. Any change in legislation or regulations that govern the review and approval process
relating to our future technologies could make it more difficult and costly to obtain approval for new products based on our technologies, or to produce, market, and distribute such products if approved.
We can offer you no assurance the government and the public will accept our licensed patented technologies. If they do not, we will be unable to generate
sufficient revenues from our technologies, which may cause us to cease operations.
The commercial success of our MU 1140 and SMaRT
Replacement Therapy, Probiora3, LPT3-04 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 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 are not able to 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 demonstrate positive outcomes and reduced utilization of other products or services as well as cost data which show that treatment costs using the new product are
equal to or less than what is currently covered for other products. If we are unable to obtain favorable third party reimbursement and patients are unwilling or unable to pay for our products out-of-pocket, it could limit our revenue and harm our
business.
We have limited resources which exposes us to potential risks resulting from new internal control requirements under Section 404 of
the Sarbanes-Oxley Act of 2002.
While we have evaluated our internal controls in order to allow management to report on our
internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002, our independent registered public accounting firm has not issued its attestation report on our internal controls due to temporary rules of the SEC. There can be no
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assurances that when our independent registered public accounting firm performs its attestation work that it will concur with managements assessment.
Any failure to obtain the attestation report from our independent registered public accounting firm on the identification of material weaknesses by them could result in unexpected delays in further implementing the requirements relating to internal
controls; remediation actions or the impact that these activities will have on our operations. We also expect to incur additional expenses and diversion of managements time as a result of performing the system and process evaluation, testing
and any remediation required when our auditors perform their attestation work in order to comply with the auditor attestation requirements.
We are a small company with limited resources that will make it difficult for us to comply with the auditor attestation requirements of Section 404 in a timely fashion. If we are not able to 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.
Risk Factors Relating to our Common Stock
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.
On
April 25, 2007 we received notification from the American Stock Exchange (AMEX) that we were not in compliance with AMEXs continued listing requirements because our shareholders equity is less than $2,000,000 and we have
experienced losses from continuing operations and/or net losses in two of our most recent fiscal years. On May 1, 2007, we notified AMEX that as a result of the resignation of our independent director, Mr. George Hawes, from our Board of
Directors, we were aware that we were no longer in compliance with certain of the AMEXs continued listing standards for Small Business Issuers regarding having at least fifty percent of its Board be comprised of independent directors and
maintaining an audit committee of at least two independent directors. On May 3, 2007 we received a Warning Letter from AMEX regarding the aforementioned noncompliance. We submitted a plan on May 24, 2007 to AMEX for regaining compliance
with all of the continued listing standards, which included a newly appointed director to the Companys Board.
On September 15,
2007, Dr. Ron Evens was appointed to the Companys Board of Directors. On December 31, 2007, our Board of Directors consisted of six members of which three are independent. On July 2, 2007, AMEX notified the Company that it had
completed its review and has determined that the Companys compliance plan makes a reasonable demonstration of the Companys ability to regain compliance with the continued listing standards by the end of the plan period, October 27,
2008 and is therefore continuing the Companys listing pursuant to an extension. The proceeds from our recent August 7, 2007 financing are insufficient, alone, to regain final compliance with AMEX listing requirement. We have until
October 27, 2008 to regain AMEX compliance but there can be no assurance that we will be able to do so.
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 NASDAQs 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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that a broker or dealer approve a persons account for transactions in penny stocks; and
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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.
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In order to approve a persons account for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and
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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.
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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:
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sets forth the basis on which the broker or dealer made the suitability determination; and
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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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.
Any sale of our common stock to Fusion Capital under it 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
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Our common stock price has traded below $0.75 for a significant amount of time since we entered into the stock purchase agreement with Fusion Capital which precludes 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 an effective registration statement covering such shares, will be freely tradable. Fusion Capital may sell none, some, or all of the shares of common stock purchased from us at any
time. 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. If our stock price drops 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 stocks 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 us and by stockholders, including Fusion Capital, and subsequent sales of common stock acquired by the holders of warrants and options could have an adverse effect on the market price of our shares.
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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:
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quarter-to-quarter variations in our operating results;
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the results of testing, technological innovations, or new commercial products by us or our competitors;
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governmental regulations, rules, and orders;
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general conditions in the healthcare, dentistry, or biotechnology industries;
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comments and/or earnings estimates by securities analysts;
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developments concerning patents or other intellectual property rights;
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litigation or public concern about the safety of our products;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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additions or departures of directors, officers and key personnel;
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release of escrow or other transfer restrictions on our outstanding shares of common stock or sales of additional shares of common stock;
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potential litigation initiated against us;
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adverse announcements by our competitors; and
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the additional sale of common stock by us in capital raising transactions.
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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 companys securities. A securities class action suit against us could result in substantial costs, potential liabilities, and the
diversion of managements attention and resources. Since our initial public offering in June 2003 and through December 2007 our stock price has fluctuated from $5.00 to $0.28 per share. To the extent our stock price fluctuates and/or remains
low, it could impair our ability to raise capital through the offering of additional equity securities.
Future sales of our common stock may depress
our stock price.
The market price of our common stock could decline as a result of sales of substantial amounts of our common stock
in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. As of March 3, 2008, there were 32,538,807 shares of
our common stock outstanding, with another 1,641,136 shares of common stock issuable upon exercise of warrants to investors, 1,685,000 shares issuable upon exercise of options outstanding and an additional 1,315,000 shares available for option
grants under our stock option plans. The issuance of 1,000,000 shares of our stock underlying these options is covered by an S-8 registration statement we filed with the SEC and may be resold into the market. We have issued a significant number of
shares in connection with private placements that are available for resale pursuant to registration statements we have filed covering the resale of such shares as well as shares issuable upon exercise of warrants also issued with respect to such
private placements. The selling shareholders named in these registration statements may resell the shares they own and the shares they acquire upon exercise of the warrants. Most recently, we issued 4,600,000 shares of our common stock with warrants
to acquire an additional 4,600,000 shares of our common stock in a private placement. We were obligated to file a registration covering the resale of such shares. We filed such registration statement and it was declared effective by the SEC on
September 26, 2007. The sale of shares by selling shareholders pursuant to such registration statement and other registration statements we have filed for selling shareholders to resell the shares of our common stock they acquired from us in
private transactions, could cause our stock price to decline significantly.
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Forward-Looking Statements
This 10-KSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include statements regarding, among other things, (a) our anticipated needs for and availability of working capital, (b) our future financing plans, (c) our strategies, (d) our projected sales and
profitability,(e) anticipated trends in our industry. 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. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements
expressed or implied by any forward-looking statements. These statements may be found under Managements Discussion and Analysis or Plan of Operation and Business, as well as in this 10-KSB generally. Actual events or
results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under Risk Factors and matters described in this 10-KSB generally. In
light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. In addition to the information expressly required to be included in this filing, we will provide such
further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.
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