UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM 10-K








x
            ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the fiscal year ended December 31, 2009





 ̈
            TRANSITION REPORT PURSUANT TO
      SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the transition period from
             to




Commission
file number 001-32188





ORAGENICS,
INC.


(Exact
name of registrant as specified in its charter)








Florida
            59-3410522(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            (IRS
      Employer
              Identification
      No.)




13700
      Progress Blvd., Alachua, Florida
            32615(Address
      of Principal Executive Offices)
            (Zip
      Code)




(386)
418-4018


(Issuer’s
Telephone Number, Including Area Code)





SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:





Title
      of each class
            Name
      of each exchange on which registeredNone





SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


Common
stock, par value $.001 per share










Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes   ̈    No  
x


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act.    Yes   ̈    No  x


Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).       Yes o    No   ̈


Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   ̈


Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large
accelerated filer   ̈    Accelerated
filer   ̈    Non-accelerated
filer   ̈
(Do not check if a smaller reporting company) Smaller reporting
company  x


Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).    Yes   ̈    No  x


The
aggregate market value of the voting stock held by non-affiliates of the
registrant, as of June 30, 2009 was approximately $8,303,178 based upon a last
sales price of $0.25 as reported by the OTCBB.


As of
March 17, 2010, there were 108,203,148 shares of the registrant's Common Stock
outstanding.





Documents
Incorporated by Reference: Portions of the Proxy Statement for the registrant’s
2010 Annual Meeting of Shareholders are incorporated by reference into Part III
of this Form 10-K.




TABLE
OF CONTENTS





FORWARD-LOOKING
      STATEMENTS AND CERTAIN CONSIDERATIONS
              1PART
      IITEM 1.
              BUSINESS
              3ITEM 1A.
              RISK
      FACTORS
              21ITEM 2.
              PROPERTIES
              33ITEM 3.
              LEGAL
      PROCEEDINGS
              33ITEM 4.
              RESERVED
              33PART
      II
              34ITEM 5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
              34ITEM 6.
              SELECTED
      FINANCIAL DATA
              34ITEM 7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
              35ITEM 7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              44ITEM 8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
              44ITEM 9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
              44ITEM 9A(T).
              CONTROLS
      AND PROCEDURES
              44ITEM 9B.
              OTHER
      INFORMATION
              46PART
      III
              47ITEM 10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
              47ITEM 11.
              EXECUTIVE
      COMPENSATION
              47ITEM 12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      SHAREHOLDER MATTERS
              48ITEM 13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
              48ITEM 14.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
              48PART
      IV
              48ITEM 15.
              EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
              48SIGNATURES
              49REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              F-2BALANCE
      SHEETS
              F-3STATEMENTS
      OF OPERATIONS
              F-4STATEMENTS
      OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
              F-5STATEMENTS
      OF CASH FLOWS
              F-6NOTES
      TO FINANCIAL STATEMENTS
              F-7–F-19





FORWARD
LOOKING STATEMENTS AND CERTAIN CONSIDERATIONS




This
report, along with other documents that are publicly disseminated by us,
contains or might contain forward-looking statements within the meaning of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements
included in this report and in any subsequent filings made by us with the SEC
other than statements of historical fact, that address activities, events or
developments that we or our management expect, believe or anticipate will or may
occur in the future are forward-looking statements. These statements represent
our reasonable judgment on the future based on various factors and using
numerous assumptions and are subject to known and unknown risks, uncertainties
and other factors that could cause our actual results and financial position to
differ materially. We claim the protection of the safe harbor for
forward-looking statements provided in the Private Securities Litigation Reform
Act of 1995, Section 27A of the Securities Act and Section 21E of the
Exchange Act. Examples of forward-looking statements include:
(i) projections of revenue, earnings, capital structure and other financial
items, (ii) statements of our plans and objectives, (iii) statements
of expected future economic performance, and (iv) assumptions underlying
statements regarding us or our business. Forward-looking statements can be
identified by, among other things, the use of forward-looking language, such as
“believes,” “expects,” “estimates,” “may,” “will,” “should,” “could,” “seeks,”
“plans,” “intends,” “anticipates” or “scheduled to” or the negatives of those
terms, or other variations of those terms or comparable language, or by
discussions of strategy or other intentions.




Forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially from those
contemplated by the statements. The forward-looking information is based on
various factors and was derived using numerous assumptions. Important factors
that could cause our actual results to be materially different from the
forward-looking statements include the following risks and other factors
discussed under the Item 1A “Risk Factors” in this Annual Report on Form 10-K.
These factors include:




•
            Our
      inability to continue to raise
capital,




•
            We
      have incurred significant operating losses since our inception and cannot
      assure you that we will generate revenue or
  profit,




•
            As
      a result of our lack of financial liquidity and negative shareholders’
      equity, our auditors have indicated there is uncertainty of our ability to
      continue as a “going concern,”




•
            If
      we fail to raise significant additional capital we may need to
      significantly curtail operations, marketing and development and it could
      cause us to be forced to cease
operations,




•
            If
      we raise capital it may be on terms that result in substantial dilution to
      our existing shareholders,




•
            We
      may be unable to achieve sustainable commercial viability of our consumer
      products and acceptance of our proposed
  products,




•
            Orders
      we receive for our consumer products may be subject to terms and
      conditions that could result in their cancellation or the return of
      products to us,




•
            We
      may become dependent on a few large retail customers for sales of our
      consumer products,




•
            If
      we are unable to raise sufficient capital our license for our SMaRTTM
      Replacement Therapy and M 1140 with the University of Florida Research
      Foundation could be terminated,




•
            We
      are subject to extensive and costly regulation by the FDA, applicable
      international regulators and other regulatory bodies, which must approve
      our product candidates in development and could restrict or delay the
      sales and marketing of our products and products in
      development,




•
            We
      may be unable to successfully operate
  internationally,




•
            We
      may be unable to improve upon, protect and/or enforce our intellectual
      property,




•
            We
      may be unable to enter into strategic collaborations or partnerships for
      the development, commercialization, manufacturing and distribution of our
      proposed product candidates or maintain strategic collaborations or
      partnerships,




•
            We
      may be adversely impacted by the current worldwide credit crisis and its
      impact on consumers and equity markets as well as our ability to obtain
      required additional funding to conduct our
  business,  1




•
            We
      are subject to significant
competition,




•
            As
      a public company, we must implement additional and expensive finance and
      accounting systems, procedures and controls as we grow our business and
      organization to satisfy new reporting requirements, which will increase
      our costs and require additional management
  resources.




We
caution investors that actual results or business conditions may differ
materially from those projected or suggested in forward-looking statements as a
result of various factors including, but not limited to, those described above
and in the Risk Factors section of this report. We cannot assure you that we
have identified all the factors that create uncertainties. Moreover, new risks
emerge from time to time and it is not possible for our management to predict
all risks, nor can we assess the impact of all risks on our business or the
extent to which any risk, or combination of risks, may cause actual results to
differ from those contained in any forward-looking statements. Readers should
not place undue reliance on forward-looking statements. Except as required by
applicable law, we undertake no obligation to publicly release the result of any
revision of these forward-looking statements to reflect events or circumstances
after the date they are made or to reflect the occurrence of unanticipated
events.


2


PART
I


ITEM
1. BUSINESS.





This
description contains certain forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
discussed in the forward-looking statements as a result of certain of the risks
set forth herein. We assume no obligation to update any forward-looking
statements contained herein.





Overview





We are a
multifaceted biopharmaceutical company focused on the discovery, development and
commercialization of a variety of products and technologies. Our offices are in
Tampa, Florida and Alachua, Florida. Our research and development facilities are
located in Alachua, Florida, near the University of Florida where we have
experienced scientific and management teams in place to lead the Company into
what we anticipate will bean exciting new phase of operations. We have historically operated
largely within the confines of the United States. We have also positioned
ourselves for development of a global foundation, with international partners
and customers.





Corporate
History





Oragenics
was founded in 1996 by Dr. Jeffrey Hillman and Dr. Robert Zahradnik to
commercialize the fruits of 25 years of research.  After earning a PhD
in Molecular Genetics at Harvard, Dr. Hillman began his basic research into the
concept of Replacement Therapy for preventing dental caries, or cavities, at the
Forsyth Institute in Boston. He was recruited to continue his research at the
University of Florida College of Dentistry in 1992. There, he continued to
pursue the development of a genetically engineered strain of Streptococcus mutans that
could prevent cavities by replacing the body's natural caries-causing strains of
S.
mutans.  His work in replacement therapy also led to other
discoveries such as MU 1140 and ProBiora3tm.





Corporate
Strategy





We have
transitioned from a company with a focus purely on discovery and development to
a company focused primarily on commercialization.    Our
overall strategy is to maximize shareholder value by commercializing and
developing products internally and by seeking out alliances and strategic
partnerships with major, global pharmaceutical, diagnostics and consumer
products companies.  To maximize shareholder value, we may internally
develop or commercialize some of our technologies before entertaining
investments or ventures from strategic investors or
partners.   As technologies proceed through the regulatory
process, they become significantly more valuable.  The difference in
value can be an order of magnitude higher.  As such, in certain cases,
the return on investment on clinical trials that we fund can be
exceptional.  We intend to take each technology on a case-by-case
basis to determine the most appropriate path to maximize shareholder value and
ROI.  We also intend on continuing the culture of innovation that
fostered the creation of many of our technologies.





Our
Technologies





We have a
number of technologies, products and platforms.  For ease in
understanding, we have broken them down into four distinct
groups.  Each technology can be characterized as an over-the-counter
consumer product or technology that requires the completion of all relevant FDA
clinical trials and FDA approval before it can be marketed.





(1)
            Consumer
      Healthcare


a.
            Oral
      probiotics that contain our ProBiora3TM
      technology (food additive);


b.
            Products
      for weight loss that revolve around our LPT3-04TM
      weight loss agent (food/nutritional
  supplement)




(2)
            Antibiotics


a.
            DPOLTTM
      lantibiotic synthesis platform (for generation of drug
      products);


b.
            MU
      1140, mutacin
      (drug)




(3)
            Biomarker
      Discovery


a.
            PIVIATTM
      (diagnostics, therapeutics, vaccines and drugs)
  and


b.
            PCMATTM
      (diagnostics, therapeutics, vaccines and
drugs)


3


(4)
            Biologics


a.
            SMaRT
      Replacement TherapyTM
      (biological drug)





CONSUMER
HEALTHCARE:





Our
Consumer Healthcare Division markets products that we have determined do not
require pre-approval by the Food and Drug Administration and can be sold through
retail channels.  There are two product categories; (1) Oral
Probiotics, and (2) Weight Loss.





Oral Probiotic Product
Category:





Our oral
probiotics revolve around the ProBiora3TM
technology.  ProBiora3TM employs three naturally occurring strains of
beneficial bacteria which promote oral health.  Probiotics are live
microorganisms that confer a health benefit to their host when administered in
adequate amounts. The beneficial bacteria
in a probiotic formulation help to maintain a healthy balance with bacteria in
the body. Examples of common probiotic applications are yogurt containing live
cultures and acidophilus capsules to
improve digestion, plus products for improved immune system response and vaginal
and urinary tract health.





Oral
Biology





According
to Asa et al. (Journal of Clinical Microbiology 2005 Nov; 43(11) 5721-32), the
oral cavity provides an ecological niche for over 700 bacterial species, some of
which are responsible for periodontal disease (gum disease) and dental caries
(tooth decay). Of all of the bacteria normally residing in a person’s mouth,
only about half a dozen are the primary cause of periodontal disease and dental
caries.





Regulatory
Status of Oral Probiotics





Probiotic
products that make cosmetic or structure-function claims are generally able to
enter the market without the need for extensive regulatory filings and clinical
testing. This avenue, called GRAS (“Generally Recognized as Safe”), is available
for products that are generally recognized as safe do not make any claim that
they treat, prevent, or cure a disease, which would be considered to be drug
claims. We intend to market our probiotic product in reliance on GRAS without
making disease prevention claims.





Market
Opportunities





Oral Care:  The oral
care market is exceptionally large and is expected to grow larger.  It
has been estimated by Packaged Facts that the US oral care market was $9.1
billion in 2008 and that this market will break the $10.9 billion mark by
2014.  We believe, ProBiora3tm is the
only comprehensive oral probiotic technology currently available in the oral
care market.





Companion
Pets:  According to the APPA (“American Pet Products
Association”) Pet Owners Survey, in 2009/2010, approximately 62% of US
households owned a pet, with 38.2 and 45.6 million households owning cats and
dogs, respectively.  The APPA also estimates that total pet industry
expenditures in 2009 in the US were $45.5 billion, representing an increase of
5.4% from 2008.  Of this, $10.4 billion was spent on Supplies/OTC
Medicine, representing a 5.8% increase over 2008.





Probiotics in
general:  The Probiotics markets are expected to grow at a
rapid pace during the next several years.  According to
MarketsandMarket, a research firm, the global probiotics market is expected to
reach $32.4 billion by 2014, which equates to a CAGR (“compound annual growth
rate”) of 12.6% from 2006 through 2014.   Probiotics products are
relatively common in Asia and Europe. The probiotics market in the U.S. is
emerging, and products are available that address gastrointestinal problems and
other uses, especially as nutritional supplements, food supplements or dietary
aide products.  Our oral probiotics products containing ProBiora3 are
widely recognized as the first probiotic product designed for comprehensive oral
care to hit the market.  This has provided us, with what we believe to
be, a significant first mover advantage.


4


Marketing
ProBiora3TM




To market
ProBiora3TM, we
have developed a bifurcated strategy.  We have branded the technology,
ProBiora3TM, as an
active ingredient for licensing and private labeling.  We also market
products containing ProBiora3TM under
our own house brand names.  Our house brand products will contain
different ratios, or blends, of the three natural strains contained in
ProBiora3TM and
potentially different delivery mechanisms such that each product will be
tailored to the needs of specific markets.  These products
are:





·
            EvoraPlusTM:
      a product with equal weight of all three strains that is optimally
      designed for the general consumer
market


·
            EvoraKidsTM:
      a product that has a greater concentration of the strain designed to
      address tooth health, which is more of an issue for
    children.


·
            Teddy’s PrideTM:
      a product that has a mixture that is overloaded with two strains which
      focus on cleaner teeth and fresher breath,  problems endemic
      with cats and dogs.





All three
products have been launched and are available through various distribution
channels.





Large Retailers - The Drugstore
& Big Box Retail Channels: The process for product adoption by
large retailers typically has five essential phases; (1) the incorporation of a
product into a retailer's "planagram", (2) the assignment of a "vendor ID" to
the vendor and the establishment of connectivity, typically using electronic
data interchange, (3) the transmission and receipt of an initial order, (4) the
fulfillment and delivery of the initial order, and (5) the subsequent re-order
by the retailer to replenish inventory.  In early November 2009, we
received written confirmation that EvoraPlusTM would
be included in the planagram of one of the nation's largest drugstore
chains.  In connection with our efforts with this drugstore chain, we
established a vendor ID and have since received an initial order from this
customer.  We expect to continue to approach prospective retail
customers regarding our consumer healthcare products and we are optimistic about
our prospects.





Grocery Store
Channel:We have received orders from several large regional
grocery store chains.  We are optimistic about the potential
opportunities forof our products in this
channel, there can be no assurances, however, that our products will be
successfully received by the marketplace through this channel.  We are
also in discussions with several grocery store chains including some of the
largest grocery chains in the United States.





International
Interest:We have experienced an increase in interest and
demand for our consumer products internationally.  To address such
interests, we have retained a Director of International Sales and Marketing with
substantial international marketing experience and we remain optimistic about
potential future developments from this channel.





In
addition to the distribution of our consumer healthcare products, we have
participated in a trade show and have received broad based media
coverage.





Trade Show:In
mid-November, we exhibited our products at the Supply-Side West trade show,
which is one of the largest raw material / ingredient shows in the
world.  We experienced a substantial amount of interest from a number
of company representatives in attendance at the show and we are optimistic about
the potential for future business arising from such initial
interest.





Media Exposure:In
July, a segment on EvoraPlus appeared on Fox News throughout the United
States.  This segment was followed by a subsequent segment that aired
on November 4, 2009 on Fox News.  We believe this media coverage was
beneficial for us in our efforts to gain market traction and acceptance of our
consumer healthcare products.





We remain optimistic about our
marketing efforts.  We also expect to increase the consumer awareness
of our consumer products through advertising initiatives we have
underway.





EvoraPlusTM
EvoraKidsTM and
Teddy’s PrideTM -
Description & Manufacturing





EvoraPlusTM is a
mint flavored probiotic tablet packaged in a 60 unit box with four 15-dose
blister packs.  EvoraKidsTM comes
in the same format as EvoraPlusTM except
we have exchanged the flavoring to one that is preferable to
children.  The intended use for EvoraPlusTM  and
EvoraKidsTM is for
the consumer to take one tablet twice per day after brushing.  As
such, one box equals approximately one-month’s supply of the
product.  These products are designed for repetitive use in order to
achieve the intended benefits.  We believe this feature provides the
potential for recurring revenue as consumers who continue to seek the benefits
of the products will need to continue to make purchases.





Teddy’s
PrideTM comes
in powder form, which is odorless and tasteless.  The powder is
sprinkled on a pet’s food once per day.  It is sold in a pail
containing a pre-measured measuring spoon that provides the pet the recommended
dosage per application.  Each pail provides a 60-day supply of Teddy’s
PrideTM.




5


We
have completely outsourced the manufacturing process for our probiotics
products.  We have qualified separate contract manufacturers for
production of our active, ProBiora3
probiotics blend, for powder bending and tablet manufacture, and for the
finished packaging of our probiotics products. Each of our contract
manufacturers is GMP certified with the ability to scale production as
needed.  Our arrangement with each of the manufacturers is that we
place orders for components or finished product to be produced for a fixed fee
which we are expected to pay on completion of the manufacturing
process.   Packaged probiotics products are shipped to us or to a
destination specified by us, which would be a central distribution center in the
case of either one of our larger drugstore chains or a private label
distributor.  We currently maintain an inventory of our products for
direct online sales and other sales to distributors.  We believe our
arrangements with our contract manufacturers are satisfactory to meet our
current and expected future needs.  We do not have a long-term supply
agreement or commitment
with any of our manufacturers.  Each manufacturer has the ability to
terminate its services to us at any time.  We have qualified and used
at least two contract manufacturers for each step in our manufacturing
process.  Any manufacturer has the ability to terminate its services
to us at any time.  Our arrangements with the manufacturers are not
exclusive and we are able to have our components/products contract manufactured
at other facilities, which we have already qualified in the event of loss of any
single relationship or if order volumes spike significantly.





Competition
to the ProBiora3TMTechnology




Many
companies sell probiotics that are principally designed for digestive health,
vaginal and urinary tract health, and immune system support. Our product will
not compete directly with the products of these companies. Recently, researchers
at the University of Hiroshima in Japan have published studies indicating that
Lactobacillus reuteri,
a bacterial species isolated from the gastrointestinal tract, can reduce the
levels of Streptococcus
mutans in the mouth and may aid in the prevention of tooth decay.  Lactobacillus reuteri
is widely used as a probiotic for other indications and recently has been
promoted for dental health. We are aware of a probiotic product from BioGaia
AB/Sunstar, containing a strain of lactobacillus reuteri, which
is on the market today as GUM® PerioBalance® and is targeted to maintain oral
health. Another probiotic bacteria for oral care is commercially available in
the US from the supplier, Frutarum, (known as BLIS K12 probiotic); it is
promoted for bad breath and contains the bacterium, Streptococcus salivarius K12.
This bacterium principally colonizes the cheek and tongue surfaces in the oral
cavity, and as such is promoted only for its oral care activity as an aid for
halitosis. As compared to all of these competitors, Probiora3TM, with
its unique blend of three proprietary probiotic strains, potentially has greater
beneficial actions for maintaining oral health.





Weight LossProduct
Category:





The
Company’s weight loss products are based on the discovery of LPT3-04TM.  LPT3-04TM is a
naturally occurring compound, which is normally consumed in the human diet in
small amounts.  Our scientists discovered that consumption of
significantly larger amounts results in dose dependent weight loss in
experimental animal models.  The mechanism of action appears to be
induction of apoptosis, or programmed cell death specifically in white fat
cells.  LPT3-04TM
consumption in the required amounts has been shown to be completely safe in
humans.





The
Weight Loss & Diet Control Market





According
to Marketdata, Inc., the US Weight Loss & Diet Control market was
approximately $59 billion in 2008.  Obesity is at epidemic proportions
and is a global problem.





Weight
Loss Marketing Strategy





Our
strategy for our weight loss technology is to develop a house brand to market to
consumers through channels similar to probiotics.  We plan on
developing several products under the house brand that vary by delivery
mechanism.  We expect to also develop a product for the pet market as
well.  We expect to essentially use two of the three channels that
were developed for our oral probiotic; (1) DTC and (2) Mass
Retail.  We may also market directly to Medical Professionals and
Veterinary Offices.





At
present, we are re-formulating the delivery mechanism for LPT3-04.  We
expect to conduct clinical trials for efficacy sometime in 2010.  Once
these trials have been completed, if successful, we will launch a product
containing the technology.


6


ANTIBIOTICS:





DPOLTTM





The
cornerstone of our antibiotics division is our Synthetic Chemistry Platform,
DPOLTTM
(Differentially Protected Orthogonal Lantionine Technology), which affords us
the ability to synthesize a unique class of antibiotics known as
lantibiotics.  DPOLTTM is a
patented, novel organic chemistry synthesis platform that will enable large
scale, cost effective production of clinical grade MU 1140 and potentially 50
other known lantibiotics.  Over the past 80 years, efforts to devise
methods to investigate the usefulness of this class of antibiotics have met with
uniform failure.  We believe DPOLTTM can to
lead to 6-10 new antibiotics with novel mechanisms of action.  This
represents a substantial pipeline of antibiotics to replace ones that are
currently failing due to the development of bacterial resistance.





MU
1140





Through
his work with S. mutans
at the Harvard affiliated Forsyth Institute and later at the University of
Florida, Dr. Hillman discovered MU 1140, or mutacin, a powerful
lantibiotic that is produced in the oral cavity by the natural parent of the
SMaRTTM
strain.  MU 1140 is an antibiotic that belongs to the novel class of
molecules called lantibiotics.  It is active against Gram positive
bacteria responsible for a variety of clinically important diseases such as MRSA
(methicillin-resistant Staphylococcus aureus) and
VRE (vancomycin-resistantEnterococcus faecalis).  In preliminary studies it has also
been shown to be active against both growing and non-replicating Mycobacterium tuberculosiscells.  Preclinical testing has demonstrated low toxicity,
efficacy in animal models of infection, and good pharmacological
properties.  Sensitive bacteria show minimal ability to develop
resistance to MU 1140.  In general, preclinical studies indicate that
it has the potential to replace current antibiotic drugs of last resort that are
increasingly failing.





Market
Opportunity





According
to the Center for Disease Control ("CDC"), Nosocomial infections are estimated
to occur in 5% of all acute-care hospitalizations; the incidence rate is 5
infections per 1,000 patient-days. Based on the 35 million patients admitted to
7,000 acute-care institutions in the United States, the incidence of
hospital-associated infections ("HAI's") is more than 2 million cases per
year.2HAIs
result in an additional 70,000 deaths (range 17,500-70,000) and an added
expenditure in excess of $4.5 billion. Nosocomial infections are estimated to
more than double the mortality and morbidity risks of any admitted
patient. This is the equivalent of 350,000 years of life lost in the
United States.  The critical care market for antibiotics is about $7
billion in U.S.A. Cubicin®, a newer gram positive lipopeptide antibiotic, had
2009 revenues of $562 million in the US.  The need for novel
antibiotics is increasing as a result of the growing resistance of target
pathogens. The Center for Disease Control estimates that bacteria resistant to
known antibiotics cause 44% of hospital infections; individual hospitals have
resistant rates as high as 70% for many important gram positive infections.
Vancomycin, introduced in 1956, serves as the last line of defense against
certain life-threatening infections, but certain bacteria have developed strains
which resist even vancomycin. The annual direct cost to treat HAIs is also quite
high.  The CDC estimates that the annual cost to be $35.7 to $45.0
billion dollars annually (adjusted to 2007 dollars).





Our
antibiotic, MU 1140, is a new broad spectrum antibiotic that has demonstrated
activity against a wide variety of disease-causing bacteria and a novel
mechanism of action.  Moreover, we believe there is no evidence for
development of pathogen resistance to MU 1140. In light of the fact that
pathogen resistance has become a major health problem associated with
antibiotics in use today, we believe MU 1140 offers the potential to fulfill a
significant and increasing medical need for non-resistant
antibiotics.





Preclinical
Studies





Our
scientists and others have conducted laboratory studies on MU 1140 to determine
its activity as an antibacterial agent. To test MU 1140’s ability to kill
bacteria, standard microbiological testing methods were employed. MU 1140 was
purified and incorporated into growth medium at different concentrations. The
medium was then inoculated with the bacterium under study, and its ability to
grow in the presence of MU 1140 was observed. The minimal inhibitory
concentration (MIC) of MU 1140 to inhibit growth of the test bacterium was
recorded. We believe the results of our laboratory studies demonstrate that MU
1140 is effective at killing a broad spectrum of bacteria, including Streptococcus pneumoniae,
causing the predominant type of pneumonia and bacterial endocarditis. The
antibiotic has also been shown to be effective against vancomycin-resistant
Staphylococcus aureus
and Enterococcus
faecalis.




7


MU 1140
was found to kill all gram-positive bacteria tested at concentrations comparable
to therapeutically effective antibiotics. A particularly interesting feature of
MU 1140 is that none of the sensitive species of bacteria tested was able to
acquire genetically stable resistance to purified MU 1140. During 2006 and 2007,
we completed a significant preclinical study and demonstrated that MU
1140 is effective in an animal infection model of septicemia againstStaphylococcus
aureus.  In 2007, further pharmacodynamic studies were done
demonstrating the antimicrobial activity, its novel mechanism of action, synergy
with an aminoglycoside, and utility of MU 1140, especially against drug
resistant organisms, such as MRSA (methicillin-resistant Staphylococcus aureus),VRE,
(vancomycin-resistantEnterococcus faecalis), and Streptococcus pneumoniae, all
common and serious sources of infections in humans. Pilot pharmacokinetics
studies were done.  Since 2007, research work has been focused on
scaling up the synthetic molecule through our Synthetic Chemistry Platform,
DPOLTTM
(Differentially Protected Orthogonal Lantionine Technology).





Intellectual
Property





We have
exclusively licensed the intellectual property for our MU 1140 technology from
the University of Florida Research Foundation, Inc. See the discussion regarding
our license in the Intellectual Property section under our Replacement Therapy
technology.





Progress





In the
fourth quarter of 2008, we announced the successful synthesis of an antibiotic
using our proprietary DPOLTTM technology. The molecule belongs to a class of
antibiotics called Lantibiotics that were first discovered over 80 years ago.
Although there are now over 50 different Lantibiotics known, this is the first
report of a cost-effective method for making one in sufficient amounts and with
sufficient purity to enable comprehensive testing and commercial viability. We
have retained Almac Sciences in October 2008, a leading contract manufacturer
and a division of the Almac Group, to refine and scale-up GMP production of the
synthetic MU1140TM analogue to achieve sufficient quantities for it to be fully
tested for regulatory approval.  In conjunction with Almac, we
continued throughout 2009 to improve and refine the processes we have developed
to shorten the process to scale MU 1140 and decrease overall production
costs.  We currently estimate that, once commenced, the regulatory
process will take at least four years of clinical testing and the application
and approval of an NDA by the FDA before this drug could be commercially
available. Other synthetic Lantibiotics are expected to follow as they are
developed and tested.





Competition





MU 1140
would compete directly with antibiotic drugs such as vancomycin and newer drugs,
Cubicin (daptomycin) and Zyvox (linezolid).  Given the growing
resistance of target pathogens to even new antibiotics, we believe that there is
ample room in the marketplace for additional antibiotics.





We are
aware of a mutacin peptide similar to MU 1140 patented in the U.S. by the
University of Laval in Quebec. Successful development of that technology would
constitute major competition for MU 1140.  Management believes that
the Laval peptide, if developed, would infringe on the MU 1140patent.





Many of
our competitors are taking approaches to drug development differing from our
approach, including traditional screening of natural products; e.g., genomics to
identify new targets, and combinatorial chemistry to generate new chemical
structures. Competition in the pharmaceutical industry is based on drug safety,
efficacy, ease of use, patient compliance, price, marketing, and distribution.
Commercial success of MU 1140 technology will depend on our ability and the
ability of our sub-licensees to compete effectively in all of these areas,
against other companies with existing and pipeline antibiotics to be
commercialized in the future. There can be no assurance that competitors will
not succeed in developing products that are more effective than MU 1140 or would
render MU 1140 obsolete and non-competitive.





Producers
of antibiotic products include many large, international pharmaceutical
companies, who have much greater financial and technical resources than us. We
intend to compete in the antibiotic market by obtaining a strategic partner with
an established product development record and sales force. There can be no
assurance that we will be able to obtain any such partner. If not, we will need
to develop our own product and channels of distribution for products based on
the MU 1140 technology. There can be no assurance that we will be able to do
so.





BIOMARKER
DISCOVERY:





Our
Biomarker Discovery division is driven by our two proprietary platforms for the
identification of genetic targets that can be used in diagnostic tests as well
as in vaccines and therapeutics.  The two platforms are PIVIATTM
(Proteomic-based In-Vivo Induced Antigen Technology) and PCMATTM
(Proteomic-based Change Mediated Antigen Technology).  What we believe
makes our platforms unique is that we focus on the infection or disease in vivo, or in the body,
rather than in vitro,
or in the test tube.  We believe that infections and diseases behave
differently in different environments and produce different proteins, or gene
targets.  One of the first major initiatives has proven this to be
true; our study on colorectal cancer.




8




Developing
a Diagnostic Test Using Gene Targets





The
process to develop a diagnostic test using gene targets has the following basic
steps:





(1)
            Identification of Gene
      Targets.  We use our proprietary platforms to identify
      gene targets for specific disease
states.





(2)
            Validation.  Once
      targets have been identified, they then need to be
      validated.  This can be done internally or by a
      third-party.  Once targets have been validated they can be sold
      or licensed to a third party diagnostics, therapeutics or vaccine
      company.





(3)
            Incorporation into a Diagnostic
      Test, Therapeutic or Vaccine.  Validated targets can then
      be incorporated into a diagnostic test, therapeutic or
      vaccine.





Once a
test is developed, it would then need to go through the appropriate regulatory
process in order to be registered and marketed.  In the US, this will
typically require the filing of a 510K application with the FDA, to-date we have
not commenced any filings with the FDA regarding diagnostic tests using our gene
targets.





Our
revenues for out-licensing markers would typically be a combination of upfront
fees, milestone payments based on regulatory filings and approvals, and
royalties on the sale of diagnostic tests, therapeutics or vaccines to end
users.  Fees will vary depending on the timing of a licensing
arrangement.  Obviously, gene targets that have been discovered and
validated will command a higher premium.  Our objective is to carry
our gene targets as far down the process as possible.  At present, we
are developing techniques to validate targets as quickly and efficiently as
possible.  Eventually, we would like to have all three steps performed
internally.





PIVIATTM Brief
Description





PIVIATTM is a
platform technology that enables rapid identification of novel targets for use
in the diagnosis and treatment of human infectious diseases.  The
method is faster, more cost effective, and more sensitive than other methods
currently in use to identify such targets.  As an example, a recent
tuberculosis project has yielded 44 novel targets for Mycobacterium tuberculosisthat are currently being analyzed for their use in vaccine and diagnostic
strategies.





PCMATTM Brief
Description





PCMATTM is a
platform technology that was derived from and greatly extends the potential
applicability of PIVIATTM.  This
technology rapidly identifies proteins (and their genes) that are expressed when
a cell undergoes any sort of change.  PCMATTM has
been used to identify proteins of both plants and pathogens that are expressed
during infection.  Such genes are excellent targets for manipulation
to increase the resistance of the plant to infection.  It has also
been used to identify novel proteins of human bowel cells that are expressed
when the cell undergoes transformation to a cancerous cell. Such proteins are
excellent targets for new diagnostics and therapeutic
strategies.  PCMATTM has the
potential to study an extraordinary range of medical and agricultural
applications.





The
In Vitro Diagnostics (“IVD”) Market





In 2007,
according to Research and Markets, the global In Vitro Diagnostics market was in
excess of $38 billion with a forecasted compound annual growth rate of
6.7%.  The fastest growing segment of the In Vitro Diagnostics market
is molecular diagnostics, which has a compound annual growth rate of
15.4%.





Progress





We
continue to make advances with our biomarker discovery platforms.  One
major advance, which we internally characterize as the “fluidics approach”, has
shown substantial promise.  The fluidics approach focuses primarily on
the discovery and analysis of shed proteins.  Through this adaption to
our platforms, we believe we will be able to discover a small set of high-value
protein targets for a variety of disease states in a fraction of the time and at
a fraction of the cost compared to our competitors.  We are in the
final stages of completing a proof of concept for the fluidics
approach.  If the fluidics approach is proven, then we anticipate we
will initiate studies on a number of disease states during the
year.




9




BIOLOGICS:





SMaRT
Replacement TherapyTM





SMaRT
Replacement TherapyTM is a single, painless, one time, 5 minute topical treatment
that has the potential to offer lifelong protection against dental caries (tooth
decay). Dental caries is a worldwide epidemic that affects the majority of
populations in industrialized and developing countries. According to the World
Health Organization, tooth decay is the most prevalent chronic infectious
disease, affecting more than 5 billion people. Much of the tooth decay in
low-income countries remains untreated until the teeth are
extracted.  Replacement therapy is suitable for use by the general
population. The ideal application would be to treat children when bacterial
colonization of their new tooth surfaces is occurring. Applied topically to the
teeth with a swab, the therapy can be administered by dentists to patients
during routine office visits.





Replacement
therapy represents a novel approach to preventing bacterial infections by
capitalizing on interactions between different strains or species of bacteria
inhabiting the same ecosystem. This approach involves permanently implanting a
harmless strain of bacteria in the host’s microflora. Once established, the
harmless strain prevents the colonization and outgrowth of potential pathogens,
including harmful bacteria that cause tooth decay.





Tooth
decay is characterized by the dissolution of enamel and dentin, eventually
resulting in the destruction of the entire tooth. The immediate cause of tooth
decay is lactic acid produced by microorganisms on the tooth
surface.  Studies suggest that of the 400 to 700 oral micro-organisms,
Streptococcus mutans (S.
mutans), a common bacterium found in virtually all humans, is the
principal causative agent in the development of tooth decay. Residing within
dental plaque, S.
mutans derives its energy from carbohydrate metabolism as it converts
dietary sugar to lactic acid which, in turn, erodes the tooth
enamel.





Our
replacement therapy technology is based on genetically altering the bacterium,
S. mutans, and employs
this genetically modified strain of S. mutans that does not
produce lactic acid. When applied to the teeth, this non-lactic acid-producing
organism can displace and permanently replace the indigenous lactic
acid-producing strains of S.
mutans, thereby potentially providing lifelong protection against most
forms of tooth decay.





Regulatory
Status





We have
conducted a FDA Phase I clinical trial and we have been approved for a FDA Phase
I(b) clinical trial.  We anticipate initiating this second Phase I
safety trial in the coming months.  We also believe that SMaRT
Replacement Therapy will be an appealing technology for developing
countries.





Manufacturing, Marketing and
Distribution





The
manufacturing methods for producing our genetically modified strain of Streptococcus mutans are
standard fermentation techniques. These techniques involve culturing bacteria in
large vessels and harvesting them when mature by centrifugation or filtration.
The cells are then suspended in a pharmaceutical medium appropriate for
application in the human mouth. These manufacturing methods are commonplace and
readily available within the pharmaceutical industry. Upon successful completion
of Phase I clinical trials, we intend to consider sublicensing our replacement
therapy technology to one or more strategic partners that would be responsible
for advanced clinical development and commercialization including product
manufacturing, marketing, and distribution.





Market
Opportunity





Despite
the introduction of fluorides in public water systems, fluoridated toothpastes,
fluoride treatments in the dental office and dental sealants, tooth decay still
affects the majority of children and adults. There are a number of factors that
are likely to increase the incidence and frequency of tooth decay which
include:





·
            increasing
      consumption of dietary sugar;


·
            increasing
      consumption of bottled water, which generally does not contain fluoride;
      and


·
            increasing
      age of the population.





During
the last 20 years, sugar consumption has increased. Higher dietary intake of
sugar predisposes individuals to higher rates of tooth
decay.  Moreover, according to the Beverage Marketing Corporation, in
2005, U.S. consumers drank more bottled water than any other alcoholic or
non-alcoholic beverage, with the exception of carbonated soft drinks. Since
bottled water generally does not contain fluoride, the protective effects of
fluoridated public water systems are lost. With the aging of the population, the
incidence and frequency of tooth decay is likely to further increase as most of
the baby boomers upon reaching retirement age will have a relatively intact
dentition unlike previous generations. Therefore, more teeth will be at risk for
tooth decay.


10




Replacement
therapy represents a novel approach to preventing tooth decay.  The
technology confers potentially lifelong protection against tooth decay with one
treatment, is anticipated to be used by the general population and involves
minimal patient education and compliance.





Competition





We are
not aware of any direct competitors with respect to our licensed, patented
replacement therapy technology. However, there may be several ways to disable or
eradicate S. mutans. We
know that certain companies and several academic and research institutions are
developing and testing caries vaccines aimed at eradicating S. mutans. An alternative
approach involves topical application of adhesion-blocking synthetic peptides
that prevent S. mutans
from attaching to the tooth surface. Products that result in the elimination of
S. mutans from the
natural ecosystem would require major studies to determine whether such
eradication of naturally occurring bacteria might not create serious, unintended
consequences. The problem with eradicating S. mutans is that it disrupts
the natural ecosystem leaving a void for another pathogen potentially more
harmful than S. mutans
to dominate.





Any
product based on our replacement therapy technology will compete against
traditional oral care products used to combat tooth decay. These products
include fluoride-based toothpastes as well as fluoride treatments and tooth
sealants administered by dentists. These competitors could include, among
others, Colgate; Procter & Gamble; Unilever; GlaxoSmithKline; and Dentsply.
All of these companies are much larger and have far greater technical and
financial resources than us.





Our
In-Licensed Technology Agreements





Replacement
Therapy





We have
exclusively licensed the intellectual property for our replacement therapy
technology from the University of Florida Research Foundation, Inc., a nonprofit
Florida corporation (the “Florida Research Foundation”).  The original
license agreement was dated August 4, 1998 and was subsequently amended on
September 15, 2000, July 10, 2002, September 25, 2002 and March 17, 2003. The
amended license agreement provides us with an exclusive worldwide license to
make, use and sell products and processes covered by Patent No. 5,607,672,
entitled “Replacement Therapy for Dental Caries”, which was filed in the United
States Patent Office on June 7, 1995 and made effective on March 4,
1997.  The patent will expire on June 7, 2015. Our license is for the
period of the patent, subject to the performance of terms and conditions
contained therein. The patent covers the genetically altered strain of Streptococcus mutans which
does not produce lactic acid, a pharmaceutical composition for administering the
genetically altered strain and the method of preventing tooth decay by
administering the strain.  See “-Our Intellectual
Property”.





We issued
599,940 shares of our common stock to the Florida Research Foundation as partial
consideration for the initial license.





We
received notification from Celunol (formerly B.C. International Corporation) on
July 29, 2002 that a gene utilized in our licensed, patented strain of Streptococcus mutans
infringes a patent which it holds under a license from the Florida Research
Foundation.  On September 17, 2006, Celunol notified us regarding the
possibility of a sublicense.  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. On February 12, 2007 Celunol and the
Diversa Corporation announced that they had signed a definitive merger agreement
and subsequently formed the Verenium Corporation.





MU 1140.





We have
exclusively licensed the intellectual property for our MU 1140 lantibiotic
technology from the Florida Research Foundation.  The original license
agreement was dated June 22, 1998 and was subsequently amended on September 15,
2000, July 10, 2002,  September 25, 2002 and March 17, 2003. The
amended license agreement provides us with an exclusive worldwide license to
make, use and sell products and processes covered by Patent No. 5,932,469
entitled “Antimicrobial Polypeptide and Methods of Use”.Our license is for the
period of the patent, subject to the performance of terms and conditions
contained therein.  See “-Our Intellectual Property.”





Additional  Terms
of License Agreements





In the
amended license agreements, the Florida Research Foundation has reserved the
right to use and sell products and services for research purposes only. The
amended license agreements also provide the Florida Research Foundation with a
license, for research purposes only, to any improvements that we make to the
products and processes covered by the patents.


11




We are
obligated to pay 5% of the selling price of any products developed from the
licensed technologies that we may sell as royalty to the Florida Research
Foundation.  In addition, if we sublicense any rights granted by the
amended license agreements, we are obligated to pay the Florida Research
Foundation twenty percent (20%) of all revenues received from the sublicenses
(excluding monies received solely for development costs).





We are
also obligated to make minimum annual royalty payments to the Florida Research
Foundation for the term of the amended license agreement in the amount of
$50,000 by the end of each year for each license agreement.   The
minimum royalty payments are required to be paid in advance on a quarterly
basis.  For the replacement therapy and Mutacin 1140 minimum royalty
payments, we must pay the Florida Research Foundation an aggregate of $100,000
which is required to be paid in equal quarterly installments of
$25,000.





Under the
terms of the amended license agreements, in each calendar year and in addition
to the royalty payment obligations, we are obligated to spend, or cause to be
spent, an aggregate of $1,000,000 on the research, development, and regulatory
prosecution of our replacement therapy and Mutacin 1140 technologies combined,
until a product which is covered wholly or partially by the claims of the
patent, or is manufactured using a process which is covered wholly or partially
by the claims of the patent, is sold commercially.  If we fail to make
these minimum research and development expenditures, the Florida Research
Foundation may terminate our license agreement.





We must
also pay all patent costs and expenses incurred by the Florida Research
Foundation for the preparation, filing, prosecution, issuance and maintenance of
the patent.





We have
agreed to indemnify and hold the Florida Research Foundation harmless from any
damages caused as a result of the production, manufacture, sale, use, lease,
consumption or advertisement of the product.





We are
required to maintain liability insurance coverage appropriate to the risk
involved in marketing the products, for which we obtained liability insurance
that expired March, 2010. Our liability insurance has been renewed up through
March 2011 however there is no assurance that we can obtain continued coverage
on reasonable terms.





The
amended license agreements further provide that the United States government
funded research grant No. RO1 DE04529 during the course of or under which the
licensed inventions covered by the patent were conceived.  As such the
United States Government is entitled, as a right, under the provisions of US law
to a nonexclusive, nontransferable, irrevocable, paid-up license to practice or
have practiced the inventions of such patents for governmental
purposes.





In
order to protect our license rights and their patents, we or the Florida
Research Foundation may have to file lawsuits and obtain injunctions. If we do
that, we will have to spend large sums of money for attorney fees in order to
obtain the injunctions. Even if we do obtain the injunctions, there is no
assurance that those infringing on our licenses or the Florida Research
Foundation’s patents will comply with the injunctions. Further, we may not have
adequate funds available to prosecute actions to protect or to defend the
licenses and patents, in which case those infringing on the licenses and patents
could continue to do so in the future.





GOVERNMENT
REGULATIONS:





The
formulation, manufacturing, processing, packaging, labeling, advertising
distribution and sale of our products are subject to regulation by federal
agencies, including, but not limited to:





•
            the
      Food & Drug Administration (the
“FDA”);


•
            the
      Federal Trade Commission (the
“FTC”);


•
            the
      Drug Enforcement Administration (the
“DEA”);


•
            the
      Consumer Product Safety Commission (the
“CPSC”);


•
            the
      United States Postal Service
(“USPS”);


•
            the
      Environmental Protection Agency (“EPA”);
and


•
            the
      Occupational Safety and Health Administration
  (“OSHA”).





These
activities are also regulated by various agencies of the states, localities and
foreign countries in which our products are sold. In particular, the FDA, under
the Federal Food, Drug and Cosmetic Act (the “FDCA”) regulates the safety,
manufacturing, labeling and distribution of OTC drugs, medical devices, dietary
supplements, functional toiletries, and skin care products. In addition, the FTC
has primary jurisdiction to regulate the advertising of OTC drugs, medical
devices, dietary supplements, functional toiletries and skin care products and
the USPS regulates advertising claims with respect to such products sold by mail
order.  The National Advertising Division ("NAD") of the Council of
Better Business Bureaus oversees an industry-sponsored self-regulatory system
that permits competitors to resolve disputes over advertising claims. The NAD
has no enforcement authority of its own, but may refer matters that the NAD
views as violating FTC guides or rules to the FTC for further
action.  While we use our best efforts to adhere to the regulatory and
licensing requirements, as well as any other requirements affecting our
products, compliance with these often requires subjective legislative
interpretation. Consequently, we cannot assure that our compliance efforts will
be deemed sufficient by regulatory agencies and commissions enforcing these
requirements. Violation of these regulations may result in civil and criminal
penalties, which could materially and adversely affect our operations. Recent
events have suggested that the regulatory requirements governing our industry
may expand in the near future.


12


In
foreign countries these same activities may be regulated by Ministries of
Health, or other local regulatory agencies.  The manner in which
products sold in foreign countries are registered, how they are formulated, or
what claims may be permitted may differ from similar products and practices in
the U.S.





Generally
Recognized As Safe(“GRAS”) Status





Under the FDCA any substance that is
intentionally added to food is a food additive, that is subject to premarket
review and approval by the FDA, unless the substance is generally recognized,
among qualified experts, as having been adequately shown to be safe under the
conditions of its intended use, or unless the use of the substance is otherwise
excluded from the definition of a food additive.  The specific data
and information that demonstrate safety depend on the characteristics of the
substance, the estimated dietary intake, and the population that will consume
the substance.





Dietary
Supplements





The
Dietary Supplement Health and Education Act of 1994 (“DSHEA”) was enacted on
October 25, 1994. DSHEA amends the FDCA by defining dietary supplements, which
include vitamins, minerals, amino acids, nutritional supplements, herbs and
botanicals, as a new category of food separate from conventional food. DSHEA
provides a regulatory framework to ensure safe, quality dietary supplements and
to foster the dissemination of accurate information about such products. Under
DSHEA, the FDA is generally prohibited from regulating dietary supplements as
food additives or as drugs unless product claims, such as claims that a product
may diagnose, mitigate, cure or prevent an illness, disease or malady, permit
the FDA to attach drug status to a product. In such case, the FDA could require
pre-market approval to sell the product. Manufacturers are not required to
obtain prior FDA approval before producing or selling a dietary supplement
unless the ingredient is considered “new” or was not on the market as of October
15, 1994.





Dietary supplement products may include
truthful, non-misleading and substantiated statements of nutritional
support.  Examples of such claims are statements describing general
well-being resulting from consumption of a dietary ingredient or the role of a
nutrient or dietary ingredient in affecting or maintaining a structure or
function of the body.  These claims are also known as
“structure/function” claims.  FDA requires companies which include
structure/function claims on their labeling to notify the agency of the claim
within 30 days of first marketing the dietary supplement with the identified
claims.  FDA does not typically respond to these notifications, but
could issue a “courtesy letter” should the agency question some aspect of the
submission.  A dietary supplement that includes a structure/function
claim on its labeling is also required to include a disclaimer stating that the
FDA has not evaluated the claim.  FDA distinguishes between
structure/function claims which do not require FDA pre-approval and
disease-related health claims which require FDA prior approval or the issuance
of an authorizing regulation.  There can be no assurance that the FDA
will not determine that a particular statement of nutritional support that we
want to use is an "unauthorized health or disease claim" or an unauthorized
version of a "health claim." Such a determination might prevent us from using
the claim.





A product
marketed as a dietary supplement and subsequently approved for use as a drug or
biologic may continue to be sold and regulated as a dietary supplement unless
the FDA specifically finds that it is unsafe for use as a dietary supplement. A
substance that has not been marketed as a dietary supplement prior to its
approval as a drug or biologic, or prior to initiation of substantial clinical
investigations for such uses, may be sold as a dietary supplement only pursuant
to an FDA regulation authorizing its use as a dietary supplement.





The FDA may take enforcement action
against a dietary supplement if the FDA believes the supplement presents a
significant or unreasonable risk of illness or injury under conditions of use
suggested in the labeling or under ordinary conditions of use. Under DSHEA, the
FDA bears the burden of proof to show that a dietary supplement presents a
significant or unreasonable risk of illness or injury. The FDA may also take
enforcement action for unlawful promotion of a dietary supplement.





The FDA has finalized some of its
regulations to implement DSHEA including those relating to nutritional labeling
requirements and nutritional support claims. The FDA also has under development
additional regulations and guidelines to implement DSHEA. Newly adopted and
future regulations may require expanded or different labeling for our dietary
supplements. We cannot determine what effect these regulations, when fully
implemented, will have on our business in the future. These regulations could
require the reformulation or discontinuance of certain products, additional
recordkeeping, warnings, notification procedures and expanded documentation of
the properties of certain products and scientific substantiation regarding
ingredients, product claims and safety. Failure to comply with applicable FDA
requirements can result in sanctions being imposed on us or the manufacture of
our products including, but not limited to, warning letters, product recalls and
seizures, injunctions or criminal prosecution.




13


The FDA has promulgated regulations
relating to the manufacturing process for drugs, which are known as current Good
Manufacturing Practices, (GMP’s). In June 2007, the FDA published the final
rule on GMP’s for dietary supplements, with an effective date of June 25,
2008.  As authorized by DSHEA, the FDA adopted GMPs specifically for
Dietary Supplements. These new GMP regulations are more detailed than the GMPs
that previously applied to dietary supplements and require, among other things,
dietary supplements to be prepared, packaged and held in compliance with
specific rules, and require quality control provisions similar to those in the
GMP regulations for drugs.  We source all of our dietary supplement
products from outside suppliers. We believe the manufacturing and distribution
practices we utilize will comply with the new rules.   As part of
its regulatory authority, the FDA may periodically conduct audits of the
physical facilities, machinery, processes and procedures that we, or our
suppliers, use to manufacture products. The FDA may perform these audits at any
time without advanced notice. As a result of these audits, the FDA may order us,
or our suppliers, to make certain changes in manufacturing facilities and
processes. We may be required to make additional expenditures to comply with
these orders or the new GMP requirements, or possibly discontinue selling
certain products until we, or our suppliers, comply with these orders and
requirements. As a result, our business could be adversely
affected.





Although the regulation of dietary
supplements in some respects is less restrictive than the regulation of drugs,
there can be no assurance that dietary supplements will continue to be subject
to less restrictive regulation. In December 2006, the Dietary Supplement
and Nonprescription Drug Consumer Protection Act (the "AER Act") amended the
FDCA to require that manufacturers, packers, and distributors of dietary
supplements report serious adverse events to FDA. The AER Act became effective
on December 22, 2007. We expect to be in compliance with the AER
Act.





Our
advertising of dietary supplement products is also subject to regulation by the
Federal Trade Commission under the Federal Trade Commission Act, in addition to
state and local regulation. The Federal Trade Commission Act prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce. The Federal Trade Commission Act also provides that the dissemination
or the causing to be disseminated of any false advertisement pertaining to drugs
or foods, which would include dietary supplements, is an unfair or deceptive act
or practice. Under the Federal Trade Commission’s Substantiation Doctrine, an
advertiser is required to have a “reasonable basis” for all objective product
claims before the claims are made. Failure to adequately substantiate claims may
be considered either deceptive or unfair practices. Pursuant to this Federal
Trade Commission requirement we are required to have adequate substantiation for
all material advertising claims made for our products.





In recent
years the Federal Trade Commission has initiated numerous investigations of
dietary supplement and weight loss products and companies. The Federal Trade
Commission is reexamining its regulation of advertising for dietary supplements
and has announced that it will issue a guidance document to assist supplement
marketers in understanding and complying with the substantiation requirement.
Upon release of this guidance document we will be required to evaluate our
compliance with the guideline and may be required to change our advertising and
promotional practices. We may be the subject of investigation in the future. The
Federal Trade Commission may impose limitations on our advertising of products.
Any such limitations could materially adversely affect our ability to
successfully market our products. The Federal Trade Commission has a variety of
processes and remedies available to it for enforcement, both administratively
and judicially, including compulsory processes, cease and desist orders, and
injunctions. Federal Trade Commission enforcement can result in orders
requiring, among other things, limits on advertising, corrective advertising,
consumer redress, divestiture of assets, rescission of contracts and such other
relief as may be deemed necessary. A violation of such orders could have a
material adverse affect on our business, financial condition and results of
operations.





Governmental
regulations in foreign countries where our plans to commence or expand sales may
prevent or delay entry into the market or prevent or delay the introduction, or
require the reformulation, of certain of our products. Compliance with such
foreign governmental regulations is generally the responsibility of our
distributors for those countries. These distributors are independent contractors
over whom we have limited control.





We may
have certain products manufactured pursuant to contracts with customers who
distribute the products under their own or other trademarks. Such private label
customers are subject to government regulations in connection with their
purchase, marketing, distribution and sale of such products. We are subject to
government regulations in connection with our manufacturing, packaging and
labeling of such products. Our private label customers are independent companies
and their labeling, marketing and distribution of their products is beyond our
control. The failure of these customers to comply with applicable laws or
regulations could have a materially adverse effect on our business, financial
condition, results of operations and cash flows.





We may be
subject to additional laws or regulations by the Food and Drug Administration or
other federal, state or foreign regulatory authorities, the repeal of laws or
regulations which we consider favorable, such as the Dietary Supplement Health
and Education Act of 1994, or more stringent interpretations of current laws or
regulations, from time to time in the future. We are unable to predict the
nature of such future laws, regulations, interpretations or applications, nor
can we predict what effect additional governmental regulations or administrative
orders, when and if promulgated, would have on our business in the future. The
Food and Drug Administration or other governmental regulatory bodies could,
however, require the reformulation of certain products to meet new standards,
the recall or discontinuance of certain products not able to be reformulated,
imposition of additional record keeping requirements, expanded documentation of
the properties of certain products, expanded or different labeling and
scientific substantiation. Any or all of such requirements could have a
materially adverse affect on our business, financial condition, results of
operations and cash flows.




14




The FDA
regulates the formulation, manufacturing, packaging, labeling and distribution
of OTC drug products under a "monograph" system that specifies active drug
ingredients that are generally recognized as safe and effective for particular
uses. If an OTC drug is not in compliance with the applicable FDA monograph, the
product generally cannot be sold without first obtaining the FDA approval of a
new drug application, a long and expensive procedure. There can be no assurance
that, if more stringent statutes are enacted for dietary supplements, or if more
stringent regulations are promulgated, we will be able to comply with such
statutes or regulations without incurring substantial expense.





The FDA
has broad authority to enforce the provisions of the FDCA applicable to dietary
supplements and OTC drugs, including powers to issue a public "warning letter"
to a company, to publicize information about illegal products, to request a
voluntary recall of illegal products from the market, and to request the
Department of Justice to initiate a seizure action, an injunction action, or a
criminal prosecution in the US courts.





FDA
Regulation — Approval of Biological Products and New Drug
Products





Under the
FDCA all “new drugs” and “biological products”, including over the counter “OTC”
products, are subject to pre-market approval by the FDA under the new drug
application (“NDA”) process. The FDC Act defines a “new drug” as a drug that is
not generally recognized among scientifically qualified experts as safe and
effective for use under the conditions stated in its labeling. A drug might also
be considered new if it has not been used, outside of clinical investigations,
to a material extent or for a material time under conditions described for a
product. A drug that is generally regarded as safe and effective is not a “new
drug” and therefore does not require pre-market approval.





Biological
products, like other drugs, are used for the treatment, prevention or cure of
disease in humans. In contrast to chemically synthesized small molecular weight
drugs, which have a well-defined structure and can be thoroughly characterized,
biological products are generally derived from living material—human, animal, or
microorganism— are complex in structure, and thus are usually not fully
characterized.  The Public Health Service (PHS)
Act defines a biological product as a “virus, therapeutic serum, toxin,
antitoxin, vaccine, blood, blood component or derivative, allergenic product, or
analogous product, applicable to the prevention, treatment, or cure of a disease
or condition of human beings.” FDA regulations and policies have established
that biological products include blood-derived products, vaccines, in vivo
diagnostic allergenic products, immunoglobulin products, products containing
cells or microorganisms, and most protein products.  Biological products
subject to the PHS Actalso meet the definition of drugsunder the Federal Food, Drug and Cosmetic Act
(FDCA).   Biological products are a subset of drugs;
therefore both are regulated under provisions of the FDCA.  However,
only biological products are licensed under the PHS Act.  The overall
development process is similar to that for drugs. The steps ordinarily required
before a biological product or new drug may be marketed in the United States
include:





•
            completion
      of preclinical studies according to good laboratory practice
      regulations;





•
            the
      submission of an IND application to the FDA, which must become effective
      before human clinical trials may
commence;





•
            performance
      of adequate and well-controlled human clinical trials according to good
      clinical practices to establish the safety and efficacy of the proposed
      biological product for its intended
use;





•
            satisfactory
      completion of an FDA pre-approval inspection of the manufacturing facility
      or facilities at which the product is manufactured, processes, packaged or
      held to assess compliance cGMP; and





•
            the
      submission to, and review and approval by, the FDA of a biologics license
      application “BLA”, or new drug application (“NDA”), that includes
      satisfactory results of preclinical testing and clinical
      trials.





Preclinical
tests include laboratory evaluation of the product candidate, its formulation
and stability, as well as animal studies to assess the potential safety and
efficacy of the product candidate. The FDA requires that preclinical tests be
conducted in compliance with good laboratory practice regulations. The results
of preclinical testing are submitted as part of an IND application to the FDA
together with manufacturing information for the clinical supply, analytical
data, the protocol for the initial clinical trials and any available clinical
data or literature. A 30-day waiting period after the filing of each IND
application is required by the FDA prior to the commencement of clinical testing
in humans. In addition, the FDA may, at any time during this 30-day waiting
period or any time thereafter, impose a clinical hold on proposed or ongoing
clinical trials. If the FDA imposes a clinical hold, clinical trials cannot
commence or recommence without FDA authorization.





Clinical trials to support BLAs and
NDAs involve the administration of the investigational product to human subjects
under the supervision of qualified investigators. Clinical trials are conducted
under protocols detailing, among other things, the objectives of the study, the
parameters to be used in monitoring safety and the efficacy criteria to be
evaluated.  Clinical trials are typically conducted in three
sequential phases, but the phases may overlap.


15





In
Phase I clinical trials, the initial introduction of the biological product
candidate into human subjects or patients, the product candidate is tested to
assess safety, dosage tolerance, absorption, metabolism, distribution and
excretion, including any side effects associated with increasing
doses.





Phase II clinical trials usually
involve studies in a limited patient population to identify possible adverse
effects and safety risks, preliminarily assess the efficacy of the product
candidate in specific, targeted indications; and assess dosage tolerance and
optimal dosage.





If a product candidate is found to be
potentially effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken within an expanded patient
population at multiple study sites to further demonstrate clinical efficacy and
safety, further evaluate dosage and establish the risk-benefit ratio of the
product and an adequate basis for product labeling.





Phase IV, or post-marketing,
trials may be mandated by regulatory authorities or may be conducted
voluntarily. Phase IV trials are typically initiated to monitor the safety
and efficacy of a biological product in its approved population and indication
but over a longer period of time, so that rare or long-term adverse effects can
be detected over a much larger patient population and time than was possible
during prior clinical trials. Alternatively, Phase IV trials may be used to
test a new method of product administration, or to investigate a product’s use
in other indications. Adverse effects detected by Phase IV trials may
result in the withdrawal or restriction of a drug.





If the required Phase I, II and
III clinical testing is completed successfully, the results of the required
clinical trials, the results of product development, preclinical studies and
clinical trials, descriptions of the manufacturing process and other relevant
information concerning the safety and effectiveness of the biological product or
new drug candidate are submitted to the FDA in the form of a BLA or NDA. In most
cases, the BLA must be accompanied by a substantial user fee. The FDA may deny a
BLA or NDA if all applicable regulatory criteria are not satisfied or may
require additional data, including clinical, toxicology, safety or manufacturing
data. It can take several years for the FDA to approve a BLA or NDA once it is
submitted, and the actual time required for any product candidate may vary
substantially, depending upon the nature, complexity and novelty of the product
candidate.





Before approving an application, the
FDA will inspect the facility or facilities where the product is manufactured.
The FDA will not approve a BLA unless it determines that the manufacturing
processes and facilities are in compliance with cGMP
requirements.





If the FDA evaluations of the BLA or
NDA and the manufacturing facilities are favorable, the FDA may issue either an
approval letter or an approvable letter. The approvable letter usually contains
a number of conditions that must be met to secure final FDA approval of the
BLA or NDA. When, and if, those conditions have been met to the FDA’s
satisfaction, the FDA will issue an approval letter. If the FDA’s evaluation of
the BLA, NDA or manufacturing facility is not favorable, the FDA may refuse to
approve the BLA or NDA or issue a non-approvable letter that often requires
additional testing or information.





The
required testing, data collection, analysis and compilation of an IND and a new
biological or drug application are labor intensive and costly and may take a
great deal of time. Tests may have to be redone or new tests performed in order
to comply with FDA requirements.  It can take considerable time (e.g.
5-10 years) and resources to establish a Phase II or III clinical trial and
achieve enrollment sufficient to commence such trials and ultimately proceed
through to approval. Therefore, we cannot estimate with any certainty the length
or the costs of the approval process. We can offer no assurance that we will
ever receive FDA approval of products derived from our licensed, patented
technologies.





FDA
Regulation — Approval of
Medical Devices





The FDCA
defines a medical device, which would be subject to premarketing and
postmarketing regulatory controls as an instrument, apparatus, implement,
machine, contrivance, implant, in vitro reagent, or other similar or related
article, including a component part, or accessory which is:





·
            recognized
      in the official National Formulary, or the United States Pharmacopoeia, or
      any supplement to them,


·
            intended
      for use in the diagnosis of disease or other conditions, or in the cure,
      mitigation, treatment, or prevention of disease, in man or other animals,
      or


·
            intended
      to affect the structure or any function of the body of man or other
      animals, and which does not achieve any of it's primary intended purposes
      through chemical action within or on the body of man or other animals and
      which is not dependent upon being metabolized for the achievement of any
      of its primary intended purposes.





Medical
devices are also subject to extensive regulation by the FDA. To be commercially
distributed in the United States, medical devices must receive either 510(k)
clearance or pre-market approval, or PMA, from the FDA prior to marketing.
Devices deemed to pose relatively low risk are placed in either Class I or
II, which requires the manufacturer to submit a pre-market notification
requesting permission for commercial distribution, or 510(k) clearance. Devices
deemed by the FDA to pose the greatest risk, such as life-sustaining,
life-supporting or implantable devices, devices deemed not substantially
equivalent to a previously 510(k) cleared device and certain other devices are
placed in Class III which requires PMA.


16





To obtain 510(k) clearance, a
manufacturer must submit a pre-market notification demonstrating that the
proposed device is substantially equivalent in intended use and in safety and
efficacy to a previously 510(k) cleared device, a device that has received PMA
or a device that was in commercial distribution before May 28, 1976. The
FDA’s 510(k) clearance pathway usually takes from four to twelve months, but it
can last longer.





After a device receives 510(k)
clearance, any modification that could significantly affect its safety or
efficacy, or that would constitute a major change in its intended use, requires
a new 510(k) clearance or could require PMA. The FDA requires each manufacturer
to make this determination, but the FDA can review any such decision. If the FDA
disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, the
agency may retroactively require the manufacturer to seek 510(k) clearance or
PMA. The FDA also can require the manufacturer to cease marketing and/or recall
the modified device until 510(k) clearance or PMA is
obtained.





A product not eligible for 510(k)
clearance must follow the PMA pathway, which requires proof of the safety and
efficacy of the device to the FDA’s satisfaction. The PMA pathway is much more
costly, lengthy and uncertain than the 510(k) approval pathway. A PMA
application must provide extensive preclinical and clinical trial data and also
information about the device and its components regarding, among other things,
device design, manufacturing and labeling. As part of the PMA review, the FDA
will typically inspect the manufacturer’s facilities for compliance with quality
system regulation requirements, which impose elaborate testing, control,
documentation and other quality assurance procedures. Upon acceptance by the FDA
of what it considers a completed filing, the FDA commences an in-depth review of
the PMA application, which typically takes from one to two years, but may last
longer. The review time is often significantly extended as a result of the FDA
asking for more information or clarification of information already
provided.





If the FDA’s evaluation of the PMA
application is favorable, and the applicant satisfies any specific conditions
(e.g., changes in labeling) and provides any specific additional information
(e.g., submission of final labeling), the FDA will issue a PMA for the approved
indications, which can be more limited than those originally sought by the
manufacturer. The PMA can include post-approval conditions that the FDA believes
necessary to ensure the safety and efficacy of the device including, among other
things, restrictions on labeling, promotion, sale and distribution. Failure to
comply with the conditions of approval can result in an enforcement action,
which could have material adverse consequences, including the loss or withdrawal
of the approval.





Even after approval of a pre-market
application, a new PMA or PMA supplement is required in the event of a
modification to the device, its labeling or its manufacturing
process.





FDA
Regulation — Post-Approval Requirements





Even if
regulatory clearances or approvals for our product candidates are obtained, our
products and the facilities manufacturing our products will be subject to
continued review and periodic inspections by the FDA. For example, as a
condition of approval of a new drug application, the FDA may require us to
engage in post-marketing testing and surveillance and to monitor the safety and
efficacy of our products. Holders of an approved new BLA, PMA or 510(k)
clearance product are subject to several post-market requirements, including the
reporting of certain adverse events involving their products to the FDA,
provision of updated safety and efficacy information, and compliance with
requirements concerning the advertising and promotion of their
products.





In addition, manufacturing facilities
are subject to periodic inspections by the FDA to confirm the facilities comply
with cGMP requirements. In complying with cGMP, manufacturers must expend money,
time and effort in the area of production and quality control to ensure full
compliance. For example, manufacturers of biologic products must establish
validated systems to ensure that products meet high standards of sterility,
safety, purity, potency and identity. Manufacturers must report to the FDA any
deviations from cGMP or any unexpected or unforeseeable event that may affect
the safety, quality, or potency of a product. The regulations also require
investigation and correction of any deviations from cGMP and impose
documentation requirements.





In addition to regulations enforced by
the FDA, we are also subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control Act,
the Resource Conservation and Recovery Act and other federal, state and local
regulations. Our research and development activities involve the controlled use
of hazardous materials, chemicals, biological materials and radioactive
compounds.





International
Regulation





Our
product candidates are subject to regulation in every country where they will be
tested or used. Whether or not we obtain FDA approval for a product candidate,
we must obtain the necessary approvals from the comparable regulatory
authorities of foreign countries before we can commence testing or marketing of
a product candidate in those countries. The requirements governing the conduct
of clinical trials and the approval processes vary from country to country and
the time required may be longer or shorter than that associated with FDA
approval.


17





In the European Economic Area,
composed of the 25 European Union Member States, plus Norway, Iceland and
Lichtenstein, marketing authorization applications for medicinal products may be
submitted under a centralized or national procedure. Detailed preclinical and
clinical data must accompany all marketing authorization applications that are
submitted in the European Union. The centralized procedure provides for the
grant of a single marketing authorization, referred to as a community
authorization, that is valid for the entire European Economic Area. Under the
national or decentralized procedure, a medicinal product may only be placed on
the market when a marketing authorization, referred to as a national
authorization, has been issued by the competent authority of a European Economic
Area country for its own territory. If marketing authorization is granted, the
holder of such authorization may submit further applications to the competent
authorities of the remaining member states via either the decentralized or
mutual recognition procedure. The decentralized procedure enables applicants to
submit an identical application to the competent authorities of all member
states where approval is sought at the same time as the first application. We
expect to position our products so that we will be eligible to seek commercial
approval of our products under either the centralized or national
procedure.





Under the mutual recognition procedure,
products are authorized initially in one member state, and other member states
where approval is sought are subsequently requested to recognize the original
authorization based upon an assessment report prepared by the original
authorizing competent authority. The other member states then have 90 days
to recognize the decision of the original authorizing member state. If the
member states fail to reach an agreement because one of them believes that there
are grounds for supposing that the authorization of the medicinal product may
present a potential serious risk to public health, the disagreement may be
submitted to the Committee for Medicinal Products for Human Use of the European
Medicines Agency for arbitration. The decision of this committee is binding on
all concerned member states and the marketing authorization holder. Other member
states not directly concerned at the time of the decision are also bound as soon
as they receive a marketing application for the same product. The arbitration
procedure may take an additional year before a final decision is reached and may
require the delivery of additional data.





The European Economic Area requires
that manufacturers of medical devices obtain the right to affix the CE Mark to
their products before selling them in member countries. The CE Mark is an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. In order to obtain the right
to affix the CE Mark to a medical device, the medical device in question must
meet the essential requirements defined under the Medical Device Directive
(93/42/ EEC) relating to safety and performance, and the manufacturer of the
device must undergo verification of regulatory compliance by a third party
standards certification provider, known as a notified body. Provided that we
enter into a long term manufacturing contract with an entity that satisfies the
requirements of the International Standards Organization, we anticipate that we
will file an application to obtain the right to affix the CE Mark as
needed.





In addition to regulatory clearance,
the conduct of clinical trials in the European Union is governed by the European
Clinical Trials Directive (2001/20/ EC), which was implemented in May 2004. This
directive governs how regulatory bodies in member states may control clinical
trials. No clinical trial may be started without authorization by the national
competent authority and favorable ethics approval.





Manufacturing facilities are subject to
the requirements of the International Standards Organization. In complying with
these requirements, manufacturers must expend money, time and effort in the area
of production and quality control to ensure full compliance.





Despite efforts to harmonize the
registration process in the European Union, the different member states continue
to have different national healthcare policies and different pricing and
reimbursement systems. The diversity of these systems may prevent a simultaneous
pan-European launch, even if centralized marketing authorization has been
obtained.





In some cases, we may plan to submit
applications with different endpoints or other elements outside the United
States due to differing practices and requirements in particular jurisdictions.
However, in cases where different endpoints will be used outside the United
States, we expect that such submissions will be discussed with the FDA to ensure
that the FDA is comfortable with the nature of human trials being conducted in
any part of the world. As in the United States, post-approval regulatory
requirements, such as those regarding product manufacture, marketing, or
distribution, would apply to any product that is approved in Mexico or
Europe.





Competition





Industry. Our industry is subject
to rapid and intense technological change. Competition is intense among
manufacturers of nutritional, non-prescription, and prescription
pharmaceuticals. We face, and will continue to face, retail, competition from
neutraceutical, pharmaceutical, biopharmaceutical, medical device and
biotechnology companies developing similar products and technologies both in the
United States and abroad, as well as numerous academic and research
institutions, governmental agencies and private organizations engaged in drug
funding or research and discovery activities both in the United States and
abroad. Academic institutions, government agencies and other public and private
research organizations may also conduct research, seek patent protection and
establish collaborative arrangements for discovery, research and clinical
development of technologies and products similar to ours.  We also
face competition from entities and healthcare providers using more traditional
methods. We believe there are a substantial number of products under development
by numerous neutraceutical, pharmaceutical, biopharmaceutical, medical device
and biotechnology companies, and it is likely that other competitors will
emerge.


18





Many of our existing and potential
competitors are large, well established pharmaceutical, chemical or healthcare
companies with considerably greater research and product development
capabilities and financial, scientific, marketing and human resources than we
do. As a result, these competitors may succeed in developing competing products
earlier than we do; obtain patents that block or otherwise inhibit our ability
to further develop and commercialize our product candidates; obtain approvals
from the FDA or other regulatory agencies for products more rapidly than we do;
or develop treatments or cures that are safer or more effective than those we
propose to develop. These competitors may also devote greater resources to
marketing or selling their products and may be better able to withstand price
competition. In addition, these competitors may introduce or adapt more quickly
to new technologies or scientific advances, which could render our technologies
obsolete, and may introduce products or technologies that make the continued
development, production, or marketing of our product candidates uneconomical.
These competitors may also be more successful in negotiating third party
licensing or collaborative arrangements and may be able to take advantage of
acquisitions or other strategic opportunities more readily than we
can.   These actions by competitors or potential competitors
could materially affect our business, financial condition and results of
operations. We cannot assure you that we will be able to compete
successfully.





Personnel.  Our ability to
compete successfully will also depend on our continued ability to attract and
retain skilled and experienced scientific, clinical development and executive
personnel, to identify and develop our product candidates and to exploit these
products and compounds commercially before others are able to develop
competitive products. Competition among biotechnology and biopharmaceutical
companies for qualified employees is intense, and there can be no assurance we
will be able to attract and retain qualified individuals. If we fail to do so,
this would have a material, adverse effect on the results of our
operations.  We do not maintain any life insurance on the lives of any
of our officers and directors. We are highly dependent on the services of our
directors and officers, particularly on those of Jeffrey Hillman. If one or all
of our officers or directors die or otherwise become incapacitated, our
operations could be interrupted or terminated.





We believe the principal competitive
factors affecting our markets include, but are not limited
to:





•
            the
      safety and efficacy of our product
candidates;





•
            the
      freedom to develop and commercialize our products, technology platforms
      and replacement therapy, including appropriate patent and proprietary
      rights protection;





•
            the
      timing and scope of regulatory
approvals;





•
            the
      cost and availability of our
products;





•
            the
      availability and scope of third party reimbursement programs;
      and





•
            the
      availability of alternative
treatments.





We are still in the process of
determining, among other things:





•
            if
      replacement therapy is safe and
effective;





•
            the
      market acceptance of EvoraPlus and our weight loss
  product;





•
            the
      timing and scope of regulatory approvals;
and





•
            the
      availability and scope of third party reimbursement
    programs.





Accordingly, we have a limited ability
to predict how competitive our products, technology platforms and replacement
therapy will be in the market place.





Our
Intellectual Property





We rely
upon a combination of licenses, patents, trade secrets, know-how, and licensing
opportunities to develop our business.  Our future prospects depend on
our ability to protect our intellectual property, particularly our
patents.  We also need to operate without infringing the proprietary
rights of third parties.





License
Agreements.We have exclusively licensed the intellectual
property for our Replacement Therapy and Mutacin 1140 technologies from the
University of Florida Research Foundation, Inc., a nonprofit, Florida
corporation.  The related patents to which our exclusive license
applies are U.S. patent 5,607,672, “Replacement Therapy for Dental Caries,” and
U.S. patent 5,932,469, “Antimicrobial Polypeptide and Methods of Use” (including
derivative patents: 6,391,285, 6,475,771, 6,964,760 and
7,067125).  See “Our In-licensed Technology
Agreements.”


19




Patents.We
attempt to protect our technology and products through patents and patent
applications. We have built a portfolio of patents and applications covering
certain of our technologies.  As of March 21, 2010, we hold two issued
U.S. patents and we have 7 non-provisional U.S. patent applications directed
toward our products and technologies.  Our pending applications cover
a range of technologies, including specific embodiments and applications for
treatment of various medical indications, improved application methods and
adjunctive utilization with other therapeutic modalities.  We reassess
the value of each patent at the time maintenance fees are due, and in cases
where maintaining the patent is judged to be of no significant strategic value
we decline to pay the fee.  The patents and patent applications we
have with respect to our products and technologies are set forth
below:





·
            Consumer products. We
      filed two patent applications on our probiotic technology on (U.S. patent
      application serial number 10/567592, filed August 10, 2004; U.S. Pat.
      Appl. Serial Number 12/482,881, filed June 11, 2009).  We also
      filed a patent application entitled “Methods for Size and Weight
      Reduction” (U.S. patent application serial number 11/265,
      414).





·
            Biomarker
      Discovery.In our Biomarker Discovery division we acquired the rights to our
      platform technology in November 2006 in connection with our acquisition of
      IviGene Corporation.  We own patents and applications directed
      toward the identification of polynucleotides expressed during the
      process of infection: In
      Vivo Induced Antigen Technology-U.S. Patent 7,033,748, and U.S.
      Patent Application Serial Nos. 09/980,845; 12/327,056; Method of Detection
      of Mycobacterium
      Tuberculosis, U.S. Patent Application Serial No. 12/293,497 filed
      3/13/07; Compositions for Detection and Treatment of Colorectal Cancer,
      PCT/US09/050938, filed 7/17/09.





·
            Antibiotics.In our Antibiotics
      division we have filed a patent application directed at the intellectual
      property surrounding the DPOLTTM
      solid/liquid phase peptide synthesis platform technology, as well as
      associated areas of lantibiotics technology, in the U.S. (Pat. No.
      7,521,529; U.S. Pat. Appl. 12/413,551) and internationally (August
      2006).  In addition, we have the exclusive license for our MU
      1140 lantibiotic technology from the University of Florida Research
      Foundation.  See “License Agreements”
  above.





·
            Biologics.We have licensed
      Replacement Therapy technology, the use of recombinant Streptococcus strains
      to combat dental caries, from the University of Florida Research
      Foundation.  See License Agreements
  above.





We also
have applications pending and/or allowed in Australia, Canada, China, Hong Kong,
Israel, Japan, Mexico, New Zealand, South Africa, South Korea, as well as in the
European Patent Office.  Because of the differences in patent laws and
laws concerning proprietary rights, the extent of protection provided by U.S.
patents or proprietary rights owned by us may differ from that of their foreign
counterparts.





The
recently passed Health Care Reform legislation contains a section that provides
a 12 year market exclusivity for new biologics. We believe that our SMaRT
Replacement TherapyTM technology would fall under this section of the reform
legislation and as such would be granted a 12 year period of protection from
biosimilar competition.





Trademarks.Our
trademarks are of material importance to our business.  We have
developed many brand names and trademarks for our
products.  Accordingly, our future success may depend in part upon the
goodwill associated with our brand names.  We currently use the
following unregistered trademarks:  SMaRT Replacement TherapyTM, MU
1140TM, Probiora3TM, IVIATTM and CMATTM, LPT3 04TM and
DPOLTTM.   Oragenics is among our non-registered trademarks. We
currently have pending with the U.S. Patent & Trademark Office, applications
for registration of our principal brands, including the marks for EVORAKIDS,
EVORAPRO, PROBIORA, and TEDDY’S PRIDE.  We also hold U.S. trademark
registrations for EVORAPLUS® and PROBIORA3®.  Finally, we hold a
European Community trademark registration for PROBIORA3®.





We also have rights to use other names
essential to our business.  Federally registered trademarks have a
perpetual life, as long as they are maintained and renewed on a timely basis and
used properly as trademarks, subject to the rights of third parties to seek
cancellation of the trademarks if they claim priority or confusion of
usage.  We regard our trademarks and other proprietary rights as
valuable assets and believe they have significant value in marketing our
products.





Protection of
Trade Secrets.We attempt to
protect our trade secrets, including the processes, concepts, ideas and
documentation associated with our technologies, through the use of
confidentiality agreements and non-competition agreements with our current
employees and with other parties to whom we have divulged such trade secrets. If
our employees or other parties breach our confidentiality agreements and
non-competition agreements or if these agreements are not sufficient to protect
our technology or are found to be unenforceable, our competitors could acquire
and use information that we consider to be our trade secrets and we may not be
able to compete effectively. Most of our competitors have substantially greater
financial, marketing, technical and manufacturing resources than we have and we
may not be profitable if our competitors are also able to take advantage of our
trade secrets.


20




Government
Grants.We have applied for and have received funding from government
agencies under the National Science Foundation’s Small Business Innovation
Research (SBIR) grants. Eligibility of public companies to receive such grants
is based on size and ownership criteria which are under review by the Small
Business Administration (SBA). As a result, our eligibility may change in the
future and additional funding from this source may not be available.  In
addition, although we seek to protect the competitive benefits we derive from
our patents, proprietary information, and other intellectual property,
we may not have the right to prohibit the United States Government from
using certain technologies developed or acquired by us due to federal research
grants or to prohibit third party companies, including our competitors,
from using those technologies in providing products and services to the United
States Government. The United States Government could have the right
to royalty-free use of technologies that we may develop under such grants.
We may commercially exploit those Government-funded technologies and may assert
our intellectual property rights against other non-Government users of
technology developed by us, but we may not be successful in our efforts to do
so.




Research
and Development Costs




We have
spent $1,833,746, $1,955,488 and $1,569,551 on research and development of our
technologies in 2009, 2008 and 2007, respectively.





Employees


As of
December 31, 2009, we had 14 full-time and no part-time employees. We have 3
employees in research and development, 5 employees in general and administrative
and 6 employees in sales, marketing and business development.  We
enjoy good employee relations. None of our employees are members of any labor
union, and we are not a party to any collective bargaining
agreement.





Available
Information





Our
website is www.oragenics.com.  On
our website we make available at no cost our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished as soon as reasonably practicable after we
electronically file such material with, or furnish them to, the United States
Securities and Exchange Commission (“SEC”).  The information contained
on our website is not a part of this annual report on Form 10-K.




ITEM
1A. 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-K and shall be
deemed to be modified or superseded to the extent that a statement contained in
our future filings modifies or replaces such statement. All of these risks may
impair our business operations. The forward-looking statements in this Form 10-K
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
Related to Our Business




We
have a limited operating history with significant losses and expect to continue
to experience losses for the foreseeable future and our independent auditors
have expressed doubt about our ability to continue as a going
concern.




We have
yet to establish any history of profitable operations.  Our
profitability will require the successful commercialization of one or more of
the technologies we either license or own. Since our organization, we have
incurred operating losses and negative cash flow from operating activities as a
result of minimal sales coupled with our significant clinical development,
research and development, general and administrative, sales and marketing and
business development expenses. Furthermore, our cash burn rate and expenses have
recently increased significantly due to our aggressive commercialization,
marketing and international initiatives. We expect to incur losses for at least
the next several years as we expand our sales and marketing capabilities, make
use of the sales and marketing capabilities of third parties and continue our
clinical trials and research and development activities.  Losses have
totaled approximately:




$5,519,348
for the year ended December 31, 2009




$6,021,742
for the year ended December 31, 2008




$2,311,712
for the year ended December 31, 2007




These
losses, among other things, have had and will continue to have an adverse effect
on our working capital, total assets and stockholders’ (deficit) equity. In
light of our recurring losses, accumulated deficit and cash flow difficulties,
the report of our independent registered public accounting firm on our financial
statements for the fiscal year ended December 31, 2009 contains an explanatory
paragraph raising substantial doubt about our ability to continue as a going
concern. Our financial statements do not include any adjustments that may be
necessary in the event we are unable to continue as a going
concern.




21




We have
experienced losses from operations during the last three years and have an
accumulated deficit of $25,511,883 as of December 31, 2009.  We have
an operating cash flow deficit of $5,799,481 for the year ended December 31,
2009 and we sustained operating cash flow deficits of $3,835,190 and $1,913,760
in 2008 and 2007, respectively.  At December 31, 2009 and December 31,
2008, we had working capital of approximately $2,564,147 and $(500,672),
respectively.




The Company's principal source of
liquidity at December 31, 2009 was $2,751,592 in cash and cash equivalents and
restricted cash.  The Company currently does not have sufficient
capital to operate beyond June 2010.




We
continue to require additional financing to operate beyond the second half of
the year.





We do not
have sufficient capital to sustain our operations beyond June 2010 and we will
require additional financing as soon as possible. If we are not able to raise
additional capital, among other things:




·


·
            We
      will need to scale back or cease our marketing and development
      efforts;


·
            We
      will be forced to cease operations;


·
            We
      will be unable to pursue further development of our
      technologies;


·
            We
      will be forced to sell off our technologies prior to maximizing their
      potential value;


·
            We
      will be unable to aggressively market our
  products;


·
            We
      will be unable to pursue patenting some of our technologies and
      development of our technologies and
products;


·
            We
      will have to lay-off personnel;


·
            We
      could be unable to continue to make public filings;
  and


·
            Our
      licenses for our SMaRTTM Replacement Therapy technology and MU 1140
      technology could be terminated.





There can
be no assurance that we will be able to raise additional capital and any of
these events would significantly harm our business.





Our business may be adversely
affected by the current economic recession.





The
domestic and international economies are experiencing a significant recession.
This recession has been magnified by the tightening of the credit markets. The
domestic and international markets may remain depressed for an undeterminable
period of time.  A prolonged recession could have a material adverse
effect on the Company's revenues, profits and its ability to obtain additional
financing if sales revenue is insufficient to sustain our operations as
needed.  In such event, we could be forced to limit our marketing and
development efforts and  significantly curtail or suspend our
operations, including laying-off employees, recording asset impairment
write-downs and other measures. We must generate significant revenues to achieve
and maintain profitability.




The
Koski Family Limited Partnership (“KFLP”) together with members of the Koski
Family have a controlling interest in our outstanding shares of common
stock.





The KFLP
together with its partners own approximately 53.4% of our outstanding shares of
common stock. Our directors, officers and principal security holders (greater
than 5%), taken as a group, together with their affiliates, beneficially own, in
the aggregate, approximately 74% of our outstanding shares of $.001 par value
common stock. Certain principal security holders are our directors or executive
officers. As a result of such ownership, these security holders may be able to
exert significant influence, or even control, matters requiring approval by our
security holders, including the election of directors. In addition, certain
provisions of Floridalaw could have the
effect of making it more difficult or more expensive for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
us.




Sales
of our consumer healthcare products may be adversely affected by fluctuations in
buying decisions of mass merchandiser, drug and food trade buyers and the trend
toward retail trade consolidation.




We sell our consumer healthcare
products to mass merchandisers and food and drug retailers in the United States.
Consequently, our revenues could be affected by fluctuations in the buying
patterns of these customers. These fluctuations may result from wholesale buying
decisions, economic conditions and other factors. In addition, with the growing
trend towards retail consolidation, we are increasingly dependent upon a few
leading retailers, whose bargaining strength can continue to grow due to their
size. Such retailers have demanded, and may continue to demand, increased
service and order accommodations as well as price and incremental promotional
investment concessions. As a result, we may face pressure on our prices and
experience increased expenses from promotions to meet these demands, which would
reduce our margins. We also may be negatively affected by changes in the
policies of our retail trade customers such as inventory destocking, limitations
on access to shelf space and other conditions.




22


Government
regulation of the processing, formulation, packaging, labeling and advertising
of our consumer healthcare products can impact our ability to market such
products.




Under the
Dietary Supplement Health and Education Act of 1994, companies that manufacture
and distribute dietary supplements are limited in the statements that they are
permitted to make about nutritional support on the product label without FDA
approval. In addition, a manufacturer of a dietary supplement must have
substantiation for any such statement made and must not claim to diagnose,
mitigate, treat, cure or prevent a specific disease or class of disease. The
product label must also contain a prominent disclaimer. These restrictions may
restrict our flexibility in marketing our consumer healthcare
products.




The FDA
has proposed GMPs (Good Manufacturing Practices) specifically for dietary
supplements. These new GMPs, when finalized, will be more detailed than the GMPs
that currently apply to dietary supplements and may, among other things, require
dietary supplements to be prepared, packaged and held in compliance with certain
rules (including quality control provisions) similar to the GMPs applicable to
drugs. There can be no assurance that, if the FDA adopts GMPs for dietary
supplements, we and/or our suppliers will be able to comply with the new rules
without incurring substantial expenses that might have a material adverse effect
on our financial position or results of operations. As a formulator, distributor
and marketer of dietary supplements, we are subject to the risk that one or more
of the ingredients in our product may become subject to regulatory action in the
future.




The
processing, formulizing, packaging, labeling and advertising of our consumer
healthcare products, however, are subject to regulation by one or more federal
agencies including the FDA, the Federal Trade Commission, the Consumer Products
Safety Commission, the Department of Agriculture and the Environmental
Protection Agency. Our activities also are subject to regulation by various
agencies of the states and localities in which our products are sold. Among
other things, such regulation puts a burden on our ability to bring products to
market. Any changes in the current regulatory environment could impose
requirements that would make bringing new products to market more expensive or
restrict the ways we can market our products. In addition, the adoption of new
regulations or changes in the interpretation of existing regulation may result
in significant compliance costs or discontinuation of product sales and may
adversely affect our revenue. The FDA may implement additional regulations with
which we would have to comply, which would increase expenses.




No
governmental agency or other third party makes a determination as to whether our
products qualify as dietary supplements or not. We make this determination based
on the ingredients contained in the products and the claims we make for the
products and if our determination is denied by any regulatory authority we could
face significant penalties that may require us to shut down our
operations




If
we incur product recalls or liability claims  regarding our consumer
healthcare products, it could increase our costs and adversely affect our
reputation, revenues and operating income.




Our
consumer healthcare products are designed for human consumption and we may face
product recalls, withdrawals or declining sales, as well as liability claims if
the use of our products is alleged to have resulted in injury. Our products
consist of ingredients that are classified as foods or dietary supplements and,
in most cases, are not necessarily subject to pre-market regulatory approval in
the United States. Some of our products contain innovative ingredients that may
not have long histories of human consumption. Previously unknown adverse
reactions resulting from human consumption of these ingredients could occur. We
may be subject to various product recalls and liability claims, including, among
others, that our products include inadequate instructions for use or inadequate
warnings concerning possible side effects and interactions with other
substances. A product recall and liability claim against us could result in
increased costs and could adversely affect our reputation with our customers,
which, in turn, could have a material adverse effect on our business, results of
operations, financial condition and cash flows.




We
must spend at least $1 million annually on development of our MU 1140TM and
SMaRTTM 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 1140TM and SMaRTTM Replacement Therapy 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 1140TM and our SMaRTTM 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 SMaRTTM Replacement TherapyTM and MU 1140TM technologies will
become valueless and we may have to cease operations.




23




Until
commercial sales of any products developed from these licensed technologies take
place, we will not be earning revenues from the sale of products derived from
them and will, therefore, have to raise the money we must spend on development
of our technologies by other means, such as commercialization and sale of our
consumer products, or the sale of our common stock. There is no assurance we
will achieve a sufficient level of sales to provide such funding or 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.




We
are currently depend primarilyt upon a single third party manufacturer for our
ProBiora 3TM product.





Since we
currently have no manufacturing facilities, we are dependent upon establishing
relationships with independent manufacturers to supply our product needs. We
currently rely primarily on one key contract manufacturer as our single source
supplier for ProBiora3TM product.  If our contract manufacturer is
unable or unwilling to produce the product we would not be able to have it
manufactured until a alternative manufacturer is qualified, which could impair
our ability to commercialize the EvoraTMline ofproduct and harm our business.  We may not be able to find
alternative manufacturers on favorable terms to provide us with these services
or at all.  In addition, competitors who do own their own
manufacturing may have an advantage over us with respect to pricing,
availability of product and in other areas through their control of the
manufacturing process.




The
manufacture of our products is a highly exacting and complex process, and if our
manufacturers or suppliers encounters problems manufacturing products, our
business could suffer.




The
manufacture of our products is a highly exacting and complex process, due in
part to strict regulatory requirements.  Problems may arise during
manufacturing for a variety of reasons, including equipment malfunction, failure
to follow specific protocols and procedures, problems with raw materials,
natural disasters, and environmental factors. In addition, certain suppliers are
currently used for certain products and materials. If problems arise during the
production of a batch of product, that batch of product may have to be
discarded. This could, among other things, lead to increased costs, lost
revenue, damage to customer relations, time and expense spent investigating the
cause and, depending on the cause, similar losses with respect to other batches
or products. If problems are not discovered before the product is released to
the market, recall and product liability costs may also be incurred. To the
extent our manufacturers or suppliers experiences significant manufacturing
problems, this could have a material adverse effect on our revenues and
profitability.




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
SMaRTTM Replacement Therapy technology has been granted clearance to begin Phase
1 human clinical trials by the FDA. Clinical trials on our SMaRTTM 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 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 SMaRTTM Replacement Therapy or fail
to obtain FDA clearance for our other drug technologies, we may have to cease
further development.




Many
of 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.





Many of our product candidates are in
the early development stage. Although we have current data which indicates the
promise of the concept of our technologies (including, SMaRTTM Replacement
Therapy, MU 1140TM, PIVIATTM, PCMATTM, DPOLTTM and LPT3-04), 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 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.


24




Our
contracts may be delayed, terminated or reduced in scope with little or no
notice, which could adversely impact our profitability.


Many of
our contracts with our clients may be terminated or reduced in scope with little
or no notice. Cancellations may occur for a variety of reasons, including the
failure of our product to satisfy safety and/or efficacy requirements,
unexpected results of our product or our decision to reduce research and
development activities. In addition, if we are unable to provide the sufficient
number of staff required for a project, the contract may be delayed, terminated,
or reduced in scope.


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 shareholders. 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 commercializing and 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 marketing and product development areas such as, but
not limited to, sales and branding, 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 and marketing products
that are more desirable or 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 limited number of research scientists, who have 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 Executive Officer, David Hirsch, our Chief Scientific Officer, Dr.
Jeffrey D. Hillman, and our Chief Financial Officer, Brian Bohunicky 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 employment
agreements with Dr. Hillman and Mr. Hirsch.  Dr. Hillman’s agreement
automatically renews for one-year terms unless 90 days written notice is given
by either party.  Mr. Hirsch’s agreement automatically renews for
one-year terms unless 30 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.




25





It
is possible that our SMaRTTM Replacement Therapy technology will be less
effective in humans than it has been shown to be in animals. It is possible our
MU 1140TM 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 SMaRTTM 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, Mutacin
has been undertaken solely in the laboratory and in animals. We have not yet
conducted human studies of Mutacin. It is possible that when these studies are
conducted, they will show that MU1140 is ineffective or harmful. If Mutacin is
shown to be ineffective or harmful, we will be unable to commercialize it and
generate revenues from sales of Mutacin. 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 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 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:




·
            lack
      of efficacy during the clinical
trials;


·
            unforeseen
      safety issues;


·
            slower
      than expected patient recruitment;
and


·
            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 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.




26


If
our expected collaborative partnerships do not materialize or fail to perform as
expected, we will be unable to develop our products as anticipated.





We expect
to enter into collaborative arrangements with third parties to develop certain
products by sublicensing our technologies to strategic partners. We cannot
assure you that we will be able to enter into these collaborations or that, if
entered, they will produce successful products. If we fail to maintain our
existing collaborative arrangements or fail to enter into additional
collaborative arrangements, the number of products from which we could receive
future revenues would decline.




Our
dependence on collaborative arrangements with third parties subjects us to a
number of risks. These collaborative arrangements may not be on terms favorable
to us. Agreements with collaborative partners typically allow partners
significant discretion in electing whether or not to pursue any of the planned
activities. We cannot control the amount and timing of resources our
collaborative partners may devote to products based on the collaboration, and
our partners may choose to pursue alternative products. Our partners may not
perform their obligations as expected. Business combinations or significant
changes in a collaborative partner’s business strategy may adversely affect a
partner’s willingness or ability to complete its obligations under the
arrangement. Moreover, we could become involved in disputes with our partners,
which could lead to delays or termination of the collaborations and
time-consuming and expensive litigation or arbitration. Even if we fulfill our
obligations under a collaborative agreement, our partner can terminate the
agreement under certain circumstances. If any collaborative partner were to
terminate or breach our agreement with it, or otherwise fail to complete its
obligations in a timely manner, our chances of successfully commercializing
products would be materially and adversely affected.




We
are subject to risks of doing business  internationally.




We have
formed a subsidiary in Mexico and may encounter certain risks of doing business
internationallyincluding:




·
            differences
      in protection of our intellectual property
  rights;


·
            unexpected
      changes in, or impositions of, legislative or regulatory requirements that
      may limit our ability to conduct research or sell our products and
      repatriate funds to the United
States;


·
            political
      and economic instability;


·
            fluctuations
      in foreign exchange rates;


·
            difficulty
      in staffing, developing and managing foreign operations as a result of
      distances, languages and cultural
differences;


·
            difficulties
      in enforcement of contractual
obligations;


·
            national
      and regional labor strikes or labor
  requirements;


·
            increased
      costs in maintaining international research, manufacturing, marketing
      operations;


·
            potential
      trade restrictions and exchange
controls;


·
            political
      instability; and


·
            the
      burden of complying with foreign
laws.





Our
exposure to these risks could cause us to be unable to attain the anticipated
benefits and our business could be adversely impacted.




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.




27




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 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. For example, while we plan to market
Probiora3TM and LPT3-04TM products in the United States under self proclaimed GRAS
(Generally Recognized As Safe) status; 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 in the United
States or internationally. If the FDA or any other governmental regulatory body
does not agree with our contention that certain of our products are exempt from
testing and approval, we could be required to undergo the regulatory authority
approval process.  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 or other governmental regulatory
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.  More stringent regulatory 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. For example, 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.




28


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 applicable regulatory authority 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.




U.S. and
foreign governmental regulations mandating price controls and limitations on
patient access to our products could impact our business, and our future results
could be adversely affected by changes in such regulations.  In the
U.S., pharmaceutical products are subject to increasing pricing
pressures.  Such pressures have increased as the result of the 2003
Medicare Modernization Act due to the enhanced purchasing power of the private
sector plans that negotiate on behalf of Medicare beneficiaries.  In
addition, if the 2003 Medicare Modernization Act were amended to impose direct
governmental price controls and access restrictions, it could have a significant
adverse impact on our future revenues and business. In addition, MCOs, as well
as Medicaid and other government agencies, continue to seek price
discounts.  Some states have implemented and other states are
considering price controls or patient-access constraints under the Medicaid
program and some states are considering price-control regimes that would apply
to broader segments of their populations that are not Medicaid eligible. Other
matters also could be the subject of U.S. federal or state legislative or
regulatory action that could adversely affect our business, including changes in
patent laws, the importation of prescription drugs from outside the U.S. at
prices that are regulated by the governments of various foreign countries,
restrictions on U.S. direct-to-consumer advertising or limitations on
interactions with healthcare professionals and the use of comparative
effectiveness methodologies that could be implemented in a manner that focuses
primarily on the cost differences and minimizes the therapeutic differences
among pharmaceutical products.




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 as 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. If we are not
able to obtain third party reimbursement for products based on our technologies,
it could limit our revenue.





Our
success in obtaining payment for a new product from third parties such as
insurers and government programs 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.




29


If
users of our proposed products are unable to obtain adequate reimbursement from
third-party payers, or if new restrictive legislation is adopted, market
acceptance of our proposed products may be limited and we may not achieve
revenues.





The
continuing efforts of government and insurance companies, health maintenance
organizations and other payers of healthcare costs to contain or reduce costs of
health care may affect our future revenues and profitability, and the future
revenues and profitability of our potential customers, suppliers and
collaborative partners and the availability of capital. For example, in certain
foreign markets, pricing or profitability of prescription pharmaceuticals is
subject to government control. In the U.S., given recent federal and state
government initiatives directed at lowering the total cost of health care, the
U.S. Congress and state legislatures will likely continue to focus on health
care reform, the cost of prescription pharmaceuticals and on the reform of the
Medicare and Medicaid systems. While we cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could materially harm our business, financial
condition and results of operations.




Our
ability to commercialize our proposed products will depend in part on the extent
to which appropriate reimbursement levels for the cost of our proposed
formulations and products and related treatments are obtained by governmental
authorities, private health insurers and other organizations, such as HMOs.
Third-party payers are increasingly challenging the prices charged for medical
drugs and services. Also, the trend toward managed health care in the U.S. and
the concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and drugs, as well
as legislative proposals to reform health care or reduce government insurance
programs, may all result in lower prices for or rejection of our
products.




Products
are sold subject to a right of return to our customers.





Our consumer healthcare products may
be sold to mass retail customers with a right of return.  This
practice is not unusual or uncommon for retail customers in our business. For
example, a right of return may be granted when the shelf life has reached its
expiration or the product has remained unsold for a period of time. We are just
beginning our roll out of our consumer healthcare products on a larger scale to
mass retailers and we have limited data to determine the expected returns in
future periods in situations when we may grant rights of return.


We
have limited resources which exposes us to potential risks resulting from
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 assurances that when our independent registered
public accounting firm performs its attestation work that it will concur with
management’s 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 management’s 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.




If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud which could subject
us to regulatory sanctions, harm our business and operating results and cause
the trading price of our stock to decline.




Effective internal controls required
under Section 404 of the Sarbanes-Oxley Act of 2002 are necessary for us to
provide reliable financial reports and effectively prevent fraud. If we cannot
provide reliable financial reports or prevent fraud, our business, reputation
and operating results could be harmed. We have discovered, and may in the future
discover, areas of our internal controls that need improvement. For
example,  “material weaknesses” were identified in our quarter ended June
30, 2009 which means that there was “a significant deficiency, or a combination
of significant deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial statements will not
be prevented or detected.” During this period, we were under significant
operational stress due to a lack of liquidity and much of our staff was
terminated.  During this period and until we can complete our
remediation efforts including the re-staffing and training of our accounting
personnel, we have a higher risk of deficiencies in our financial reporting. We
cannot be certain that the measures we have taken or intend to take will ensure
that we maintain adequate controls over our financial processes and reporting in
the future. Any failure to implement required new or improved controls or
difficulties encountered in their implementation could subject us to regulatory
sanctions, harm our business and operating results or cause us to fail to meet
our reporting obligations. Inferior internal controls could also harm our
reputation and cause investors to lose confidence in our reported financial
information, which could have a negative impact on the trading price of our
stock.




30




Current
levels of securities and financial market volatility are
unprecedented.




The
capital and credit markets have been experiencing volatility and disruption for
more than 12 months. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced downward pressure
on stock prices and credit availability for certain issuers which effects may or
may not be directly related to those issuers’ underlying financial strength. If
current levels of market disruption and volatility continue or worsen, there can
be no assurance that we will not experience an adverse effect, which may be
material, on our ability to access capital and on our business, financial
condition and results of operations.




Recent
legislative and regulatory initiatives to address difficult market and economic
conditions may not stabilize the U.S. financial system or economy or benefit
us.




On
February 17, 2009, President Obama signed the American Recovery and Reinvestment
Act, to stimulate the economy. Prior to that on October 3, 2008, former
President Bush signed into law the Emergency Economic Stabilization Act of 2008
in response to the financial crises affecting the banking system and financial
markets. The U.S. Department of the Treasury and banking regulators have
implemented a number of programs under pursuant to such legislation to address
capital and liquidity issues in the banking system and to stimulate economic
recovery. There can be no assurance, however, as to the actual impact that these
programs and legislation or any other governmental program will have on the
financial markets, including the extreme levels of volatility and limited credit
availability currently being experienced, or on the economy. The failure of any
such program or the U.S. government to maintain stability in the financial
markets and a continuation or worsening of current financial market conditions
and the national and regional economy could materially and adversely affect our
business, financial condition, results of operations, access to credit and the
trading price of our common stock.




Risks
Related to our Common Stock





Our
common stock is not listed on a national U.S. securities exchange and the
application of the “penny stock” rules could adversely affect the market price
of our common stock as well as increase your transaction costs to sell those
shares.




Our
common stock trades on the OTC Bulletin Board which generally has
significantly less liquidity than securities traded on a national securities
exchange, not only in the number of shares that can be bought and sold, but also
through delays in the timing of transactions, reduction in securities analyst
and news media coverage, and lower market prices than might otherwise be
obtained. As a result, purchasers of shares of our common stock may find it
difficult to resell their shares at prices quoted in the market or at all. In
addition, if at any time the trading price of our  stock is below
$5.00 per share it is subject to the SEC’s “penny stock”
rules.  Because the “penny stock” rules impose certain requirements on
brokers, they may be less willing to execute transactions in our
securities.  Furthermore, because of the limited market and generally
low volume of trading in our common stock, our common stock is more likely to be
affected by broad market fluctuations, general market conditions, fluctuations
in our operating results, changes in the market’s perception of our business,
and announcements made by us, our competitors or parties with whom we have
business relationships. Our ability to issue additional securities for financing
or other purposes, or to otherwise arrange for any financing we may need in the
future, may also be materially and adversely affected by the fact that our
securities are not traded on a national securities exchange.




Our
stock price historically has been volatile and our stock’s trading volume has
been low.





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:




·
            quarter-to-quarter
      variations in our operating
results;


·
            the
      results of testing, technological innovations, or new commercial products
      by us or our competitors;


·
            governmental
      regulations, rules, and orders;


·
            general
      conditions in the healthcare, dentistry, or biotechnology
      industries;


·
            comments
      and/or earnings estimates by securities
  analysts;


31




·
            developments
      concerning patents or other intellectual property
  rights;


·
            litigation
      or public concern about the safety of our
  products;


·
            announcements
      by us or our competitors of significant acquisitions, strategic
      partnerships, joint ventures or capital
  commitments;


·
            additions
      or departures of directors, officers and key
  personnel;


·
            release
      of transfer restrictions on our outstanding shares of common stock or
      sales of additional shares of common
stock;


·
            potential
      litigation initiated against us;


·
            adverse
      announcements by our competitors;
and


·
            the
      additional sale of common stock by us in capital raising
      transactions.





Historically, the daily trading volume
of our common stock has been relatively low and on some days our stock does not
trade at all. We cannot guarantee that an active public market for our common
stock will be sustained or that the average trading volume will 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 December 31, 2009 our stock price has
fluctuated from $5.00 to $0.05 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.




Trading
on the OTC Bulletin Board may be volatile and sporadic, which could depress the
market price of our common stock and make it difficult for our stockholders to
resell their shares.




Our
common stock is quoted on the OTC Bulletin Board service of the Financial
Industry Regulatory Authority (FINRA). Trading in stock quoted on the OTC
Bulletin Board is often thin and characterized by wide fluctuations in trading
prices, due to many factors that may have little to do with our operations or
business prospects. This volatility could depress the market price of our common
stock for reasons unrelated to operating performance. Moreover, the OTC Bulletin
Board is not a stock exchange, and trading of securities on the OTC Bulletin
Board is often more sporadic than the trading of securities listed on a
quotation system like Nasdaq or a stock exchange like Amex. Accordingly,
shareholders may have difficulty reselling any of their shares.




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 17, 2010, there were 108,203,148 shares of our common stock outstanding,
with another 6,127,778 shares of common stock issuable upon exercise of warrants
to investors, 7,881,800 shares issuable upon exercise of options outstanding and
an additional 4,618,200 shares available for option grants under our stock
option plans. The issuance of shares of our common stock under our Stock Option
and Incentive Plan is covered by S-8 registration statements we filed with the
SEC and upon exercise of the options, such shares may be resold into the
market.  We have also issued shares in connection with private
placements that are available for resale as well as shares issuable upon
exercise of warrants also issued with respect to such private placements. Most
recently, we issued 17,016,250 shares of our common stock in a private placement
commenced in late December 2009. The resale of shares acquired from us in
private transactions, could cause our stock price to decline
significantly.





In
addition, from time to time, certain of our stockholders may be eligible to sell
all or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144, promulgated under the
Securities Act of 1933, which we refer to in this memorandum as the Securities
Act, subject to certain limitations. In general, pursuant to Rule 144, after
satisfying a six month holding period: (i) affiliated stockholders (or
stockholders whose shares are aggregated) may, under certain circumstances, sell
within any three month period a number of securities which does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of the class during the four calendar weeks prior to such
sale and (ii) non-affiliated stockholders may sell without such
limitations, provided we are current in our public reporting obligations. Rule
144 also permits the sale of securities by non-affiliates that have satisfied a
one year holding period without any limitation or restriction. Any substantial
sale of our common stock pursuant to Rule 144 or pursuant to any resale
memorandum may have a material adverse effect on the market price of our
securities.




32




We
could issue additional common stock, which might dilute the book value of our
common stock.




Our board
of directors has authority, without action or vote of our shareholders, to issue
all or a part of our authorized but unissued shares. Such stock issuances could
be made at a price that reflects a discount or a premium from the then-current
trading price of our common stock. In addition, in order to raise capital, we
may need to issue securities that are convertible into or exchangeable for a
significant amount of our common stock. These issuances would dilute your
percentage ownership interest, which would have the effect of reducing your
influence on matters on which our shareholders vote, and might dilute the book
value of our common stock. You may incur additional dilution if holders of stock
options, whether currently outstanding or subsequently granted, exercise their
options, or if warrant holders exercise their warrants to purchase shares of our
common stock.




ITEM2.PROPERTIES.





In
October 2009, we began leasing the office space located at 3000 Bayport Drive,
Suite 685, Tampa, Florida 33607.  This new location is currently being
used for sales and marketing and some administrative matters.  It is
expected that the Tampa office will ultimately become our principal executive
office in the near future.  The office space is approximately 3,150
square feet and the annual lease cost is $63,317 which includes insurance,
utilities and taxes.  The lease term expires January
2013.  Lease payments are capped during the term with the exception of
taxes and insurance exceeding 3%.  In addition to our Tampa location
we continue to lease our facility located at 13700 Progress Boulevard, Alachua,
Florida 32615.  This lease was renewed for a two year period beginning
December 2009 and expires November 2011.  The facility is
approximately 5,300 square feet of which approximately 60% is laboratory space
and the remainder is office space and common areas. The twelve months lease
costs for 2009 was approximately $97,187, of which eleven months were net of
insurance, taxes and utilities that are paid by us and the new lease cost
beginning December 2009 includes these amounts.  Lease payments are
capped during the term.  We expect the location in Alachua, Florida to
be used primarily as our research and laboratory space in the near future as we
seek to migrate move of the administrative and accounting functions to
Tampa..  There were no leasehold improvements in 2009, 2008 or
2007.  The Company terminated two lease agreements in August and
October 2009 for office spaces which were located in Alachua and St. Petersburg,
Florida, respectively.




ITEM   3.  LEGAL
PROCEEDINGS.




We are
not a party to any material legal proceedings and there are no material legal
proceedings pending with respect to our property. We are not aware of any legal
proceedings contemplated by any governmental authorities involving either us or
our property.  None of our directors, officers or affiliates is an
adverse party in any legal proceedings involving us, or has an interest in any
proceeding which is adverse to us.




ITEM  4.
RESERVED.




33




PART
II




ITEM5.MARKETFORREGISTRANT’SCOMMONEQUITY,RELATEDSTOCKHOLDERMATTERSANDISSUERPURCHASESOF EQUITYSECURITIES.




Our
common stock began trading on the NYSE Alternext US (formerly known as the
American Stock Exchange) under the symbol ONI on May 20, 2004.  Our
common stock was de-listed from the NYSE Alternext US Exchange on December 19,
2008.  Following de-listing our common stock has been quoted on the
over-the counter (OTC) Bulletin Board under the ticker symbol
“ORNI.”  On December 18, 2008, our common stock was listed on the
Alternext Paris exchange under the symbol “ALONI.”  The following sets
forth the high and low sales prices for the common stock on the NYSE Alternext
US for the period in which we were listed and the high and low bid quotations
reflected on the OTC Bulletin Board for the periods applicable in the last two
fiscal years.




Period
                  
                  2009
                  
                  
                  2008High
                  
                  
                  Low
                  
                  
                  High
                  
                  
                  LowFirst
      quarter
                  
                  $
                  0.45
                  
                  
                  $
                  0.22
                  
                  
                  $
                  0.58
                  
                  
                  $
                  0.40Second
      quarter
                  
                  $
                  0.41
                  
                  
                  $
                  0.05
                  
                  
                  $
                  0.76
                  
                  
                  $
                  0.43Third
      quarter
                  
                  $
                  0.51
                  
                  
                  $
                  0.22
                  
                  
                  $
                  0.85
                  
                  
                  $
                  0.47Fourth
      quarter
                  
                  $
                  0.32
                  
                  
                  $
                  0.20
                  
                  
                  $
                  0.81
                  
                  
                  $
                  0.20




On March
17, 2010, the closing bid price of the common stock, as reported by the OTC
Bulletin Board, was $0.60.   As of March 17, 2010, there were
approximately 95registered holders of
our common stock according to Continental Stock Transfer.  The number
of record holders does not reflect the number of beneficial owners of the common
stock for whom shares are held by banks, brokerage firms and
others.





Dividends




To date,
we have neither declared nor paid any dividends on our common stock nor do we
anticipate that such dividends will be paid in the foreseeable
future.  Rather, we intend to retain any earnings to finance the
growth and development of our business.  Any payment of cash dividends
on our common stock in the future will be dependent, among other things, upon
our earnings, financial condition, capital requirements and other factors which
the board of directors deems relevant.  In addition, restrictive
covenants contained in any financing agreements entered into in the future may
preclude us from paying any dividends.





ITEM
6 SELECTED FINANCIAL DATA.





Not applicable.


34




ITEM  7.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.





The
following information should be read in conjunction with the Financial
Statements, including the notes thereto, included elsewhere in this Form 10-K.
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-K.





Overview





We are a
multi-faceted biopharmaceutical company focused on the discovery,
development and commercialization of a variety of products and
technologies.  Our offices are located in Tampa, Florida and Alachua,
Florida.  The office in Alachua, Florida is near the University of
Florida where we have our experienced scientific team in place in which to lead
us into an exciting new phase of operations.   In 2009, we
transitioned from a company with a historic focus exclusively on research and
development to a company with increased focus on immediate and long term
commercialization and monetization.   We possess a number of
proprietary products and technologies some of which we have begun to
commercialize.   We believe that each of our products and
platform technologies addresses potentially large market
opportunities.





We
generate revenue through the sale of our consumer healthcare products and
sponsored research agreements and government grants.  We are
optimistic about the ongoing level of interest we are experiencing with our
lead branded consumer healthcare products at this time.  As our Probiora3
and EvoraPlus manufacturing, marketing and selling initiatives progress, we
expect to continue to experience a higher level of overall
expenses associated with such efforts as well as with the continued
development of our technologies.  We expect the current increases in our
expenses to continue into the near future as we fully implement the
initiatives we have underway.





Our goal
is to achieve positive operational cash flow as quickly as possible by
allocating most of our resources on the commercialization or monetization of
technologies that can provide revenues in the near term.  This
initially means that our priority will be to focus the bulk of our resources on
the Consumer Healthcare Division.  We will also seek opportunities in
Biomarker Discovery that either provide up-front money or fee-for-service
arrangements.  Concurrently, we expect to seek additional capital to
fund our operations an, is sufficient to accelerate the development of our
technologies.  While we are pursuing these priorities, we expect to
simultaneously make incremental progress in Antibiotics, Biomarker Discovery and
Biologics, as capital resources permit,  until they reach an inflexion
point and can be monetized.  The pace of any incremental progress we
may achieve, however, will be based on the amount of our limited available
capital resources we are able to allocate to each individual
technology.  If we are able to obtain sufficient additional capital,
the pace of progress would be expected to increase. Once we begin to monetize
our current technologies, we will also be able to commit greater capital to
further research and development alternative technologies that are in alignment
with our vision and strategic goals.





Financial
Strategy





Since our
inception, we have funded a significant portion of our operations from the
public and private sales of our securities. Furthermore, we have not earned
significant revenue from operations during the last two years.  Until
recently most of our revenue has been from sponsored research agreements and
various governmental grants. We will require additional capital to fund our
business operations and we continue to seek additional capital to effectuate our
business plans.  The further development, testing and
commercialization of our technologies, 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 or on favorable terms or at all. The time periods for the
expected continued development of our technologies have been extended from those
previously indicated by us from time to time due primarily to our insufficient
capital position.  The time periods for expected developments could
also 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 and
generate revenue.





Although
we have started to earn revenue from the sales of our Consumer Healthcare
products and technologies, revenue to date has been modest.  Our
objective is that the revenue from Consumer Healthcare products will be able to
fully and sufficiently support the continued operations of the Consumer
Healthcare Products Division.  We anticipate additional purchase
orders and/or revenue from the sale of EvoraPlusTM, our
oral probiotic for adults, and from Teddy’s PrideTM, our
oral probiotic for the companion pet market.  We also anticipate that,
we will have opportunities to partner with or license some of our technologies
to larger global companies.  We hope to be able to negotiate upfront
payments in connection with these potential partnerships and/or
licenses.


35




Operational
Strategy




We have a number of products and
platforms. These products and platforms are structured and viewed by us as four
distinct Divisions:




(1)
Consumer Healthcare, which consists of ProBiora3TM, the
EvoraPlusTM,
Teddy’s PrideTM and
EvoraKidsTM as well
as the LPT3-04TM weight
loss agent;




(2)
Biomarker Discovery (formerly referred to by us as “Diagnostics”), which
consists of the PIVIATTM and
PCMATTM
platforms;




(3)
Antibiotics, which consists of our lead antibiotic, MU 1140, and the DPOLTTM
lantibiotic synthesis platform; and




(4)
Biologics (formerly referred to by us as “Replacement Therapy”), which consists
of our SMaRTTM
Bacterial Replacement Therapy technology.




Because
we have limited capital and human resources, we cannot pursue commercialization
and further development of each and every technology that we own
simultaneously.  As such, we have decided to pursue a strategic course
that focuses the majority of our resources towards those technologies that
present the best opportunity to generate revenue for the Company in the
short-term.  The allocation of resources is determined by us on a
case-by-case basis and is subject to periodic review.  Currently, we
are rolling out products in our Consumer Healthcare Division and most of our
resources are being deployed in support of that endeavor.  However, we
expect to continue to commit any remaining available resources to our other
three divisions.  As the Consumer Healthcare Division matures and
begins to generate meaningful revenue and is able to become self-sustaining, we
anticipate being able to allocate greater resources to the other
divisions.  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 TherapyTM and MU 1140TM technologies.  We
believe we have met the $1,000,000 per annum threshold for research, development
and regulatory prosecution in 2009.   If we are unable to make
the minimum royalty payments in the future, our license could be terminated
which will substantially diminish the value of our company.




Highlights
and Recent Developments




Company
highlights and recent developments are set forth below in the following
categories; Operational, Financial, Corporate and Management.





Operational:





We
believe we have made important strides operationally in the second half of 2009
and in 2010.  Most notably, we recently gained significant traction in
the domestic mass retail distribution channel for our consumer healthcare
products as evidenced by the following announcements:





·
            Walgreens:  On
      February 8th,
      2010, we announced that Walgreens, the country’s largest drug store chain,
      will offer EvoraPlusTM
      chain-wide beginning March 19, 2010 and that EvoraPlusTM
      would now be available both at all of Walgreens more than 7,000 locations
      as well as its popular online
destination.





·
            A&P Supermarkets and
      Pathmark :  On December 15th,
      2009, we announced the mass retail launch of EvoraPlus and Teddy’s Pride
      in A&P Supermarkets and Pathmark, which together account for nearly
      1,000 locations across the country.





·
            Hannaford and Sweet Bay
      Supermarkets:  On December 15th,
      2009, we also announced that EvoraPlus will be carried in early January by
      Hannaford Supermarkets’ pharmacies covering Maine, Massachusetts, New
      Hampshire, New York and Vermont and Sweet Bay Supermarkets covering
      Florida.





·
            Chiropractors Buying
      Group:  On January 26th,
      2010, we announced that we have signed a distribution agreement with
      Chiropractors Buying Group (CBG) to represent our probiotic oral care mint
      EvoraPlus to chiropractic offices
nationwide.


36




·
            EvoraKids
      Launch:  On January 25th,
      2010, we announced the launch of EvoraKids, which has been specifically
      formulated for children 3-10 years old to help maintain healthy teeth,
      their biggest oral care problem.  EvoraKids features a tasty
      Wild Very Cherry Berry flavored
chew.





·
            Wolverton Garden and Pet
      Supplies:On January 7th,
      2010, we announced that we had named Wolverton Garden and Pet Supplies as
      a regional distributor for Teddy’s PrideTM, the first-ever all-natural
      probiotics breath freshener and teeth whitener created especially for dogs
      and cats.  Established in 1940 in Lansing, Michigan, Wolverton
      Garden and Pet Supplies today ranks among the industry’s largest and most
      distinguished pet supply distributors with more than 14,000 items from
      over 300 suppliers for all categories of pets. Wolverton’s customer base
      comprises kennels, veterinarian clinics, independent pet stores, and large
      chain and mass accounts.





·
            Garden of Life.On
      February 4, 2009, we announced that Garden of Life has been awarded rights
      to use our oral-care probiotic ingredient, ProBiora3. This agreement gives
      Garden of Life exclusive rights to use ProBiora3 in the natural products
      market. ProBiora3 is a patent-pending probiotic formula containing a blend
      of three bacteria that work below the gum line to address oral health at
      its root cause.





In
addition to the above announcements, the Company’s oral-care product lines have
been the subject of numerous feature stories and positive reviews in magazines,
newspapers and websites nationwide, along with television
segments.  Some of this media coverage is listed below:





·
            FOX Television: The
      Company and its core products have been featured several times on FOX
      television newscasts nationally.


·
            National Medical Report with
      Hugh Downs: The Company has been featured on the National Medical
      Report hosted by Hugh Downs.


·
            The Balancing Act:
      Oragenics and its product line were featured on The Balancing Act, an
      award-winning talk and magazine show reaching 96 million homes that airs
      weekday mornings on Lifetime Channel on January 18th,
      February 8th
      and March 8th.


·
            Newspapers and Blogs:More than 800 newspapers have discussed EvoraPlus in their
      editorial section and hundreds of health-oriented websites and grassroots
      ‘blogs’ have prominently featured both EvoraPlus and Teddy’s Pride with
      unanimous positive reviews and ‘recommendations to
    purchase’.





We
believe these events provide a solid foundation from which to build and expand
upon the marketing and distribution of our consumer healthcare products in
future periods.





Financial:





During
2009, we completed two private placement transactions.  In June 2009,
we consummated a private placement with the Koski Family Limited Partnership
(“KFLP”) which resulted in the KFLP acquiring a controlling interest in our
Company (the “June 2009 Private Placement”).  With the proceeds from
the June 2009 Private Placement, we were able to continue to initiate our
transition efforts toward commercialization of our consumer healthcare products
as well as continue the development of our other technologies.  In
addition, and in furtherance of its commitment to us, the KFLP also participated
in the initial closing of a private placement along with other accredited
investors in December 2009 (the “December 2009 Private
Placement”).  The December 2009 Private Placement provided us with
additional necessary capital and resulted in the exchange of equity for secured
debt that was outstanding to the KFLP in connection with the earlier June 2009
Private Placement.  For further information on the details of the June
2009 Private Placement and the December 2009 Private Placement see “Management’s Discussion and Analysis
of Final Condition and Results and Operations—Liquidity and Capital
Resources.”





Corporate and
Management:





At our
Annual meeting of shareholders, held on October 28, 2009, the shareholders
approvedaSecond Amendment to our
Amended and Restated 2002 Stock Option and Incentive Plan (the "Plan") to
increase the available shares from 5,000,000 to 12,500,000 shares with all other
terms of the Plan remaining the same.  In addition the shareholders
also approved an
amendment to our Articles of Incorporation to increase our authorized common
shares from 100 million (100,000,000) shares to 300 million (300,000,000). All
other provisions of the Articles of Incorporation remained in full force and
effect. The Amended Articles of Incorporation have been filed with the Secretary
of State of Florida.With these changes to
our articles we were able to proceed with the December 2009 Private Placement
and will have the availability of additional authorized shares to be able to
continue to seek additional capital on a go forward basis.





In
addition, on January 20th, 2010,
we announced that we had engaged government relations firm GSP Consulting
("GSP") to represent the Company for the purpose of securing government funding
for a number of its technologies. GSP will focus on partnering with government
and NGO healthcare organizations to increase the speed to market for
Antibiotics, Biomarker Discovery and our Biologic, SMaRT Replacement
Therapy.


37




During
the course of 2009, we also experienced changes in our directors and senior
management.  As a result of the June 2009 Private Placement, Christine
Koski, Robert Koski and David Hirsch were appointed to our Board of Directors
with Christine Koski elected as Chairperson.  Three of our then
existing directors resigned upon the consummation of the
transaction.  Our acting President and Chief Executive Officer, David
Hirsch, was also appointed President and Chief Executive Officer and Brian
Bohunicky was appointed as our Chief Financial Officer.





Business
Objectives and Milestones





In each
of our divisions we have designated business objectives as follows:





Consumer
Healthcare





Our
Consumer Healthcare unit has been tasked with the commercialization of our oral
probiotics, which revolve around the ProBiora3 technology, and the further
development and commercialization of our weight loss agent,
LPT3-04.





Oral Probiotics:  We
have established two primary goals regarding the development of our oral
probiotics business: (1) for the consumer healthcare division to become
operationally cash flow positive by the end of 2010, and (2) to maximize the
combined sale of our consumer healthcare products in the markets
served.





Weight Loss:  We are
currently in the process of re-formulating the delivery mechanism of LPT3-04
such that it provides an enhanced consumer experience.  Once this is
finished, we will conduct a clinical trial to fully establish
efficacy.  After the clinical trial has been completed and efficacy is
established, we will then begin marketing our first product in the weight loss
category.  Our goal is to begin to market a product containing
LPT3-04 in the first quarter of 2011.





Antibiotics





We are
currently scaling production of Synthetic MU 1140 with Almac Sciences, a
top-tier European peptide manufacturer.  Once this process has been
completed, we then plan on conducting pre-clinical testing.  If
pre-clinical testing is positively concluded, we will file an IND with the FDA,
which will include a protocol for Phase I clinical safety trials.  Our
goal is to complete the scale up and complete pre-clinical testing by the end of
2010 and begin Phase I clinical safety trials in the first half of
2011.  We have also started efforts to seek partnerships or licensing
arrangements with large pharmaceutical companies for both MU 1140 and the DPOLT
Platform; however, we anticipate that we will be unable to procure such
arrangements until we have completed either a pivotal pre-clinical animal trial
or Phase I clinical trials for MU 1140, our lead antibiotic.





Biomarker
Discovery





The goal
of our Diagnostics unit is to utilize the PIVIATTM and
PCMATTM
platforms to identify and secure intellectual property rights to gene targets
associated with the natural onset and progression of infections, cancers and
other diseases in humans, animals, and agricultural products. We believe these
platforms provide a number of profitable business models from which to realize
value.  We believe that our new fluidics based approach will provide
us substantial advantages once it has been fully proven.  If this
occurs, our goal will be to complete three to five studies on high-value disease
states by the end of 2010.





Biologics





Our
Biologics Division is centered on SMaRT Replacement TherapyTM, our
product for dental caries (tooth decay).  SMaRT Replacement
TherapyTM can
potentially provide substantial back-end savings to countries since the
long-term costs associated with dental caries are substantial.  We
have been approved by the FDA for a Phase I(b) clinical trial.  As
such, we are also investigating the possibility of beginning the Phase I(b)
clinical trial in the United States in the immediate future.  Popular
Mechanics cited our patented SMaRT Replacement Therapy tooth decay-fighting
bacterial strain #1 among its "20 New Biotech Breakthroughs That Will Change
Medicine" published in the monthly magazine's March 2009 issue.





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.


38




New
Accounting Pronouncements





See Notes to Financial Statements
– Item #1. Organization and Significant Accounting Policies:New Accounting
Pronouncements.





Results
of Operations:





Years ended
                    
                    
                    Three months endedDecember 31
                    
                    
                    December 312009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2009
                    
                    
                    2008Revenue
                    
                    $
                    641,285
                    
                    
                    
                    233,539
                    
                    
                    
                    133,088
                    
                    
                    
                    275,443
                    
                    
                    
                    8,539Cost
      of sales
                    
                    
                    221,198
                    
                    
                    
                    14,864
                    
                    
                    
                    -
                    
                    
                    
                    120,354
                    
                    
                    
                    14,864Operating
      expenses:Research
      and development
                    
                    
                    1,833,746
                    
                    
                    
                    1,955,488
                    
                    
                    
                    1,569,551
                    
                    
                    
                    426,230
                    
                    
                    
                    480,763Selling,
      general and administrative
                    
                    
                    4,917,844
                    
                    
                    
                    4,312,246
                    
                    
                    
                    902,655
                    
                    
                    
                    1,033,860
                    
                    
                    
                    2,502,833Total
      operating expenses
                    
                    
                    6,751,590
                    
                    
                    
                    6,267,734
                    
                    
                    
                    2,472,206
                    
                    
                    
                    1,460,090
                    
                    
                    
                    2,983,596Loss
      form operations
                    
                    
                    (6,331,503
                    )
                    
                    
                    (6,049,059
                    )
                    
                    
                    (2,339,118
                    )
                    
                    
                    (1,305,001
                    )
                    
                    
                    (2,989,921
                    )Other
      income (expense):Interest
      income
                    
                    
                    922
                    
                    
                    
                    32,511
                    
                    
                    
                    29,385
                    
                    
                    
                    126
                    
                    
                    
                    3,044Interest
      expense
                    
                    
                    (44,292
                    )
                    
                    
                    (10,054
                    )
                    
                    
                    -
                    
                    
                    
                    (18,377
                    )
                    
                    
                    (10,000
                    )Gain
      (loss) on sale of property and equipment
                    
                    
                    22,743
                    
                    
                    
                    4,860
                    
                    
                    
                    (1,979
                    )
                    
                    
                    11,469
                    
                    
                    
                    -Gain
      on extinguishment of payables
                    
                    
                    832,959
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    79,017
                    
                    
                    
                    -Local
      business tax
                    
                    
                    (177
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      other income, net
                    
                    
                    812,155
                    
                    
                    
                    27,317
                    
                    
                    
                    27,406
                    
                    
                    
                    72,235
                    
                    
                    
                    (6,956
                    )Loss
      before income taxes
                    
                    
                    (5,519,348
                    )
                    
                    
                    (6,021,742
                    )
                    
                    
                    (2,311,712
                    )
                    
                    
                    (1,232,766
                    )
                    
                    
                    (2,996,877
                    )Net
      Loss
                    
                    $
                    (5,519,348
                    )
                    
                    
                    (6,021,742
                    )
                    
                    
                    (2,311,712
                    )
                    
                    
                    (1,232,766
                    )
                    
                    
                    (2,996,877
                    )





For
the Quarters Ended December 31, 2009 and 2008





We had
$275,443 in revenue during the three months ended December 31, 2009 compared
with the $8,539 of revenues in the same period in 2008.  The revenue
was generated from $176,045 of EvoraPlus product sales, $39,216 of Teddy’s Pride
product sales and $60,182 of grant revenue recorded during the
quarter.  There were no new grants received during the three months
ending December 31, 2009.





Cost of
sales of $120,354 or 43.7% were recorded in the three months ended December 31,
2009 compared with $14,864 or 174% in the same period in 2008.  Cost
of sales associated with EvoraPlus sales were $49,112 or 27.9% and Teddy’s Pride
were $19,324 or 49.3%.  Cost of sales was higher for Teddy’s Pride due
the lower pricing of products sold into the re-label sales
channel.  Cost of sales also includes shipping and warehouse
processing expenses of $41,150 and scrap expense of $10,768.





Our
fourth quarter operating expenses consist of Research and Development (R&D)
expenses and Selling, General and Administrative (SG&A)
expenses.  R & D expenses consist primarily of salaries/benefits,
patent fees, and research expenses.  SG&A expenses consist
primarily of salaries/benefits, marketing costs, and legal
fees.  Operating expenses decreased  51.1% to $1,460,090 in
the three months ended December 31, 2009 from $2,983,596 in the same period in
2008.  R&D expenses decreased 11.3% to $426,230 in the three
months ended December 31, 2009 from $480,763 in the same period in
2008.  The R&D decrease is represented by lower salaries and
fringe benefit costs of $24,490 as a result of the reduction in staff, drop in
depreciation expense of $20,084 due to fully depreciated lab equipment and a
decrease in lab supplies expenses of $59,590.  There were several
increases in R&D during the same period which included stock options expense
of $26,638 and real estate/tangible property taxes of
$23,187.  SG&A expenses decreased 58.7% to $1,033,860 in the three
months ended December 31, 2009 from $2,502,833 in same period in 2008. Of this
decrease $1,008,505 is attributable to a reduction in legal fees and the
remaining decrease of $460,468 is attributable to decreases in filing and
registration fees of $329,345, consulting services by $159,051, officer/staff
salaries and benefits of $92,975, and travel related expenses of $63,703 offset
by increases in SG&A expenses during the same period which include stock
option expense of $87,278, selling and marketing expenses due to advertising
expense of $73,269 and the addition of staff of $24,564 in salaries and fringe
benefits.  Last year’s SG&A expenses included fees associated with
services to expand our global business in Mexico and France and fees associated
with the change in our common stock listing from the NYSE Alternext US LLC to
the OTC Bulletin Board.


39




Other
income of $72,235 for the three months ended December 31, 2009 included the gain
on extinguishment of payable of $79,017 due to the reduction in expenses owed to
several creditors following the June 29, 2009 financing transaction and an
$11,469 gain on the sales of equipment no longer being used.  It also
included interest expense for the three months ended December 31, 2009 totaling
$18,377 which primarily represents accrued interest expense on the long term
note with the KFLP (entered into as part of the June 2009 Private Placement
transaction  and repaid in exchange for our common stock
contemporaneously with the December 2009 Private Placement) offset by a small
amount of interest income in the three months ended December 31, 2009 compared
to the same period in 2008.  The lower interest income is primarily
due to the low money market interest rates available during the fourth quarter
of 2009 compared to the comparable period in the prior year.  These
lower interest rates are expected to continue for the foreseeable
future.





Our net
loss decreased 58.9% to $1,232,766 during the three months ended December 31,
2009 from $2,996,877 loss in the same period in 2008.  The improvement
in net loss is represented by increase in revenue and margin and the overall
decrease in G&A expenses.





For
the Years Ended December 31, 2009 and 2008





We had
$641,285 in revenue in the year ended December 31, 2009 as compared to $233,539
in 2008.  Revenue increased due to product sales of EvoraPlus by
$327,585 and Teddy’s Pride by $39,216.  Grant revenues also increase
by $49,484 due to the recognition of grant revenue grant associated with the
University of Florida to identify disease-specific proteins expressed during
citrus greening.





Cost of
sales of $221,198 were recorded in the year ending December 31, 2009 compared to
$14,864 in cost of sales for the same period in 2008.  Cost of sales
associated with EvoraPlus sales were $109,273 or 33.3% and Teddy’s Pride were
$19,324 or 49.3%.  Cost of sales was higher for Teddy’s Pride due the
lower pricing of products sold into the re-label sales channel.  Cost
of sales also includes shipping and warehouse processing expenses of $67,864 and
scrap expense of $24,737.





Our
operating expenses increased 7.7% to $6,751,590 for the year ended
December 31, 2009 from $6,267,734 in 2008.  R&D expenses
decreased 6.2% to $1,833,746 in 2009 from $1,955,488 in 2008.  The
decrease in R&D expense is primarily represented by the reduction in stock
options expense by $153,191.  SG&A expenses increased 14% to
$4,917,844 in 2009 from $4,312,246 in 2008.  SG&A changes include
increases in selling and marketing salaries and benefits and advertising
expenses totaling $983,349, consulting expenses of $280,604, officer/staff
salaries and benefits of $117,174, travel related expenses of $48,768, stock
options expense of $31,709 and Board fees of $26,347.  Decreases in
SG&A expenses were reflected in legal fees by $440,463 and
filing/registration fees of $360,263, relocation expenses of $44,300 and bank
financing fees of $22,572.





Other
income of $812,155 increased by $784,838 for the year ended December 31,
2009.  Other income included the gain on extinguishment of payable of
$832,959 due to the reduction in expenses owed to several creditors following
the June 29, 2009 financing transaction.  Interest expense for the
year ended December 31, 2009 totaling $44,292 represents the interest expense
for the short term note with an accredited investor and the long term note with
the KFLP which was part of the June 2009 Private Placement
transaction.  Interest income decreased by $31,589 for the year ended
December 31, 2009 compared to the same period in 2008.  This decrease
is primarily due to the nominal money market interest rates available during
2009.





Our total
net loss decreased 8.3% to $5,519,348 in the year ended December 31, 2009 from
$6,021,742 in 2008.  The improvement in the net loss was principally
caused by the increase in revenue and margin and reduction in both R&D and
G&A expenses net of the extinguishment of payables.




For
the Years Ended December 31, 2008 and 2007





We had
$233,539 in revenue in the year ended December 31, 2008 as compared to $133,088
in 2007.  This is a result of a Small Business Innovation Research
(SBIR) grant for DPOLT, a National Science Foundation (NSF) grant for our
Mutacin technology and the initial sales of ProBiora and EvoraPlus
products.  Our operating expenses increased 154% to $6,267,734 for the
year ended December 31, 2008 from $2,472,206 in 2007.  R&D
expenses increased 24.6% to $1,955,488 in 2008 from $1,569,551 in
2007.  The growth in R&D expense is represented by R&D
salaries $53,916, options expense $176,393, and consulting services/clinical
trials for Probiotics and Lilliput technologies $140,365.  SG&A
expenses increased 378% to $4,312,246 in 2008 from $902,655 in
2007.  The most significant increase was in legal fees by $1,208,259
incurred during the fourth quarter.  As mentioned above, the fees are
directly related to services to expand our global business in Mexico and France,
and also including fees to the change our common stock listing from the NYSE
Alternext US LLC to the OTC Bulletin Board.  Other major SG&A
increases include consulting services for $523,279 to promote the company and
investor relations, filing and registration fees $358,342, officer/staff
salaries and benefits $421,870, options expense $175,747, selling and marketing
expenses of $129,553, travel related expenses $145,602, and accounting
fees/services $177,038.


40




Interest
income increased 10.6% to $32,511 in the year ended December 31, 2008 from
$29,385 in the year ended December 31, 2007.





Our total
net loss increased 161% to $6,021,742 in the year ended December 31, 2008 from
$2,311,712 in 2007.  The increase  in the net loss was
principally caused by the increase in SG&A expenses for legal fees,
consulting services, filing and registration fees and
salaries/benefits.





Liquidity
and Capital Resources





Since our
inception, we have funded our operations through the sale of equity securities
in private placement and our initial public offering, the sale of equity
securities and warrants in private placements, debt financing and
grants.  During the year ending 2009, we have received $200,000 of
restricted funds as part of the $500,000 NSF Phase II grant to advance
development of its small peptide antibiotic synthesis program using our
proprietary DPOLTtm. This
federal grant will support studies focused on the synthesis and testing of our
lead antibiotic, MU 1140.  During the 3rd quarter, we received
$124,570 from the University of Florida under the prime grant with
the  Florida Citrus Production Advisory Council.





Our
operating activities used cash of $5,799,481 for the year ended
December 31, 2009 and $3,835,190 for the year ended December 31,
2008.  We had positive working capital of $2,564,147 as of December
31, 2009 compared to a working capital deficit of $500,672 as of December 31,
2008.  Cash used by operations in the year ended December 31,
2009 resulted primarily from the operating loss of $5,519,348.





Our
investing activities provided an increase in cash by $30,927 for the year ended
December 31, 2009 as a result of the sale of used lab equipment for
$40,000.  Acquisitions in 2010 included computers and office furniture
of $9,073.  We anticipate investing in a new integrated enterprise
wide business system during 2010.





Our
financing activities provided $4,904,213 in cash for the year ending December
31, 2009 compared to $4,538,687 in cash for the year ended December 31,
2008.  This increase was primarily attributable to the sale of our
common stock to accredited investors in two private placement transactions
during the year.  Additional details of our financing activities are
provided below:





Warrant Exercises – Q1 2008 –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 former 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
exercisable at the price of $0.58 per share. The unexercised warrants expired 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).  In
February 2008, amended Warrants, of 4,536,364 were issued upon exercise at the
amended exercise price resulting in additional working capital proceeds to us of
$1,996,000. The remaining unexercised August 2007 warrants expired unexercised
on August 8, 2008.





Private Placement, June 2008 –On June 12, 2008, our Securities Purchase Agreement with accredited
investors became binding and we closed on $2,600,000 in equity based financing
with net proceeds of $2,515,000. We issued a total of 5,777,778 shares of
restricted common stock in the private placement. The shares were sold to
accredited investors at $0.45 per share.  Each participating investor
also received warrants to purchase shares of common stock at the price of $1.30
per share. One warrant was issued for each share of common stock issued for a
total of 5,777,778 shares that may be acquired upon exercise of the warrants.
The warrants are exercisable and expire May 30, 2013.  We intend to
use the proceeds from the exercise of the warrants, if any, for working capital
and general corporate purposes.





Other
Financings.





On
October 20, 2008, the Company obtained from Signature Bank of New York, a
revolving line of credit in the amount of up to $1,000,000, for the purpose of
providing working capital to the Company.  We did not draw on this
line and on January 21, 2009, this line of credit was terminated by us.The Company entered into
a short term note payable in June 2008 with an interest rate of 5.75% to finance
D&O and employment related practices liability insurance.  At
December 31, 2008 the balance due was $27,687.  There were no loans
during the year 2007.  In March 2009,the Company entered into
a short term note payable for $53,087 with an interest rate of 5.75% to finance
product liability insurance.  This note matures on January 10,
2010.  At December 31, 2009 the balance was zero because the note was
subsequently repaid on its maturity date.


41




On
April 15, 2009 we entered into a loan agreement with an
accredited investor for a short term note in the amount of
$100,000.  On August 21, 2009 we paid the short term note and
outstanding accrued interest in full.  The note included an interest
rate of 15% per annum and its maturity date was April 15, 2011. 
In connection with this borrowing we also issued warrants to
acquire 100,000 shares of our common stock at an exercise price of $.50 per
share and such warrants are exercisable for five years.





On
August 6, 2009 the Company entered into a short term note payable for $70,025
with an interest rate of 5.75% to finance directors and officers liability
insurance.  This note matures on May 24, 2010.  At December
31, 2009 the balance due was $35,012.





On May 4,
2009 and June 10, 2009, we borrowed $32,556 and $13,100, respectively,
from Dr. Jeffery Hillman, our founder, Chief Science Officer and
director.  These borrowings were to be repaid upon demand by Dr. Hillman,
were unsecured and did not bear interest.  The proceeds from
these borrowings were used to purchase inventory for our Consumer
Healthcare products division.  On June 29, 2009 the aggregate amount
of these obligations of $45,656 were repaid by us in full through the issuance
of 456,564 shares of our common stock at a price of $.10 per share, which was
the closing price of our common stock on June 29, 2009.





Grants.





On
February 15, 2008, we were awarded a two year NSF SBIR Phase II grant to
advance development of our small peptide antibiotic synthesis program using the
Company’s proprietary DPOLTtm. This
federal grant supports studies focused on the synthesis and testing of our lead
antibiotic, MU 1140. While the grant will total $500,000, to date we have
received $425,000 of these restricted funds during the last two
years.





On
September 1, 2009 we received a grant funding from the University of Florida
under the prime grant with the  Florida Citrus Production Advisory
Council in the amount of $124,570.  The purpose of the University of
Florida grant is to identify disease-specific proteins expressed during citrus
greening using our proprietary PCMAT technology.





June
2009 Private Placement.





On June
29, 2009, we successfully entered into and consummated a private placement of
equity and debt financing pursuant to a securities purchase agreement (the
“Purchase Agreement”) with an accredited investor.  Pursuant to the
terms of the Purchase Agreement the Company issued 50,000,000 shares of its
Common Stock to the Koski Family Limited Partnership (“KFLP”) and issued
warrants to the KFLP to acquire 1,000,000 shares of Company common stock at an
exercise price of $0.10 per share in exchange for $4,000,000, the payment of
which consisted of the following: $1,500,000 in cash at closing and $2,500,000
pursuant to a non-interest bearing promissory note providing for five
consecutive monthly installment payments of $500,000 commencing July 31, 2009
and the KFLP provided a secured loan of  $1,000,000 to the
Company.  The loan is secured by substantially all of the Company’s
assets (excluding receivables) and bears interest at the rate of Prime plus 4.0%
which is payable quarterly.  The principal of the loan is due in five
years.  The warrants expire in five years and are immediately
exercisable.  We also agreed to provide the KFLP with certain
registration rights in connection with any underwritten or other offering by us
over the next five years.  Specifically, we shall include 15% of the
total number of shares publicly offered from the shares to be sold by us to the
KFLP.   As a result of the transaction the board of directors
believes there was a change of control of the Company with the KFLP acquiring a
controlling interest of approximately 56.6 % of our outstanding voting common
stock.





In
addition to the above, as a further condition to the consummation of the
transaction contemplated by the Purchase Agreement we were required to obtain
satisfactory arrangements with three main creditors for reductions in the
amounts payable by the Company to them.  As of June 30, 2009, these
reductions amounted to $707,674 in aggregate and were conditioned upon prompt
payment of the remaining balances owed to such creditors after taking into
account the agreed upon reductions.  As of December 31, 2009, the
amount of reductions arranged with our creditors totaled
$832,959.  These agreed upon reductions in payables have been fully
reflected in our financial statements for the period and reported under Other
Income.





In
connection with, and as a closing condition to the Purchase Agreement, the
purchasers, (including George Hawes our largest shareholder prior to this
transaction), under that certain securities purchase agreement dated June 12,
2008, (the “Hawes Agreement”) entered into waiver and release agreements with us
on June 25, 2009.  In addition, such individuals waived and
relinquished any special rights they possessed pursuant to agreements with the
Company, including, but not limited to, (i) rights of first refusal (ii)
antidilution regarding future equity sales and (iii) covenants regarding secured
lending contained in the Hawes Agreement.  In connection with such
waivers and releases, warrants to acquire 3,220,000 shares of our common stock
at an exercise price of $1.30 per share that were previously issued under the
Hawes Agreement pursuant to the Private Placement in June 2008 were subject to
the right of exchange for new replacement warrants to acquire the same number of
shares under the same terms except for a change in the exercise price from $1.30
to $0.75. In addition, to the extent of any future underwritten registered
offerings of our common stock, or the filing of any resale registration
statement, in each case occurring within five years from the date of the waiver
and release, the purchasers shall have the right to include an aggregate of up
to 5% of the shares being registered in such offering or registration statement,
subject to the discretion, in any underwritten primary offerings, of the
underwriter on the inclusion of shares in the offering to be sold by selling
shareholders.




42




December
2009 Private Placement.





On
December 30th, 2009,
we completed the initial closing of a private placement of equity pursuant to a
Common Stock Purchase Agreement (the “Securities Purchase Agreement”) with
accredited investors.  The Company issued 10,016,250 shares of its
Common Stock at a price of $0.25 per share to the investors for $2,504,062, the
payment of which consisted of the following: $2,450,000 in cash at closing and
$54,062.50 pursuant to the cancellation of the same dollar amount of outstanding
deferred compensation obligation owed by the Company to Dr. Jeffrey Hillman, our
Chief Scientific Officer and director. Approximately half of the total
investment, or $1,250,000, was made by the KFLP. In conjunction with, and as a
condition to closing of the financing, the KFLP was issued 4,000,000 shares of
the Company's Common Stock at $0.25 per share, which was the same price per
share paid by the investors, in exchange for the cancellation of its $1.0
million secured note. The loan originally had been secured by substantially all
of the Company's assets (excluding receivables) and required interest payments
at the rate of Prime plus 4.0% which were payable quarterly.





Approximately
$1.0 million of the total proceeds from the financing are to be allocated to
further the Company's development of its DPOLT synthetic chemistry platform,
essential to the production of the Company's lead antibiotic, MU 1140, subject
to the goals set forth by the two year NSF SBIR Phase II Grant received by the
Company on February 15th, 2008. Such allocation enables the Company to be
eligible to receive up to $500K in matching funds from the NSF; however, there
can be no assurances that this matching grant will in fact be
awarded.





Contemporaneously
with the financing transaction contemplated by the Securities Purchase
Agreement, the KFLP also elected to exercise previously issued warrants (issued
on June 30, 2009 as part of the June 2009 Private Placement) to purchase
1,000,000 shares of Company Common Stock. The warrants were exercised through
the payment by the KFLP of the warrant exercise price of $0.10 per share.
Additionally, Christine L. Koski and Robert C. Koski, as Directors of the
Company, each exercised previously issued options to purchase 100,000 shares of
the Company's Common Stock at the option exercise price of $0.10 per share.
These options were automatically granted to both Christine and Robert Koski when
they became non-employee directors of the Company on June 30, 2009.




On
January 13, 2010, we completed the $3,004,062 private placement
contemplated by the Securities Purchase Agreement and December 2009 Private
Placement and issued another 2,000,000 shares of common stock at a price of
$0.25 per share to the accredited investors for $500,000.  Of this
amount the KFLP again participated in one half of the remainder of the aggregate
investment by acquiring 1,000,000 shares for $250,000.





As of the
year ending December 31, 2009, included in our accounts payable for the period
were amounts that we owed to former independent directors for prior meeting
fees.  The deferred aggregate amount owed to our former directors as
of December 31, 2009 was $34,000.  The deferred amounts are expected
to be settled by us in future periods.  The deferrals of payments to
our officer and former directors did not reduce our expenses, but served to
preserve our limited cash resources at this time to the extent necessary to
maintain our operations.





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 undetermined additional financings.  We have
experienced losses from operations during the last three fiscal years and have
an accumulated deficit of $25,511,883 as of December 31, 2009.  Cash
used in operations during 2009, 2008 and 2007 was $5,799,481, $3,835,190 and
$1,913,760, respectively.  At December 31, 2009, our principal source
of liquidity was $2,751,592 of cash and cash equivalents and restricted
cash.  These operating results occurred while developing and
attempting to commercialize e products from entirely new and unique
technologies. Our business plan requires significant spending related primarily
to marketing of our Consumer Healthcare products, 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 will
likely depend on our ability  to generate meaningful and sustained
revenues from our Consumer Healthcare products and our ability to continue to
raise capital for our operations.





Our
capital requirements for the remainder of 2010 will depend on numerous factors,
including the initial success of our commercialization efforts and 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
generate revenue and cash flow from our Consumer Healthcare products division
and our ability to raise additional capital including through possible joint
ventures and/or partnerships, we expect to need to incur substantial
expenditures to further commercialize or 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. 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 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 as well as seeking equity financing.


43




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 are likely to have rights, preferences, or
privileges senior to those of our common stock, and our current stockholders may
experience substantial dilution.





While we
continue to focus on our products and technologies, we may not have sufficient
capital resources to market our products and complete the development of our
technologies.  We had a working capital at year end December 31, 2009
of $2,564,147.  While we believe our cash and cash equivalents and
restricted cash of $2,751,592 as of December 31, 2009 (together with
$500,000 in funds we received in early January 2010 on the completion of our
December 2009 private placement) are sufficient to enable us to continue to
operate through June of 2010, we do not have sufficient capital to operate
beyond that time.  During this time, if additional capital is not
raised, we would need to significantly adjust our current plan of operations
until we are able to acquire additional funding.  In addition, we
expect to continue to explore strategic alternatives that may be available to us
and our technologies.





Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements.





Inflation





Inflation
affects the cost of raw materials, goods and services that we use. In recent
years, inflation has been modest. However, high energy costs and fluctuations in
commodity prices can affect the cost of all raw materials and components. The
competitive environment somewhat limits our ability to recover higher costs
resulting from inflation by raising prices. Although we cannot precisely
determine the effects of inflation on our business, it is management's belief
that the effects on revenues and operating results will not be
significant.  We do not believe that inflation has had a material
impact on our results of operations for the periods presented, except with
respect to payroll-related costs and other costs arising from or related to
government imposed regulations.




ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.




Not applicable.




ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.





The Financial Statements are
incorporated herein by reference to pages F-1 to F-19 at the end of this report
and the supplementary data is not available.





ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.




None.




ITEM
9AT. CONTROLS AND PROCEDURES.




Evaluation
of Disclosure Controls and Procedures





Management's
evaluation of the effectiveness of the Company's disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act was
performed under the supervision and with the participation of our senior
management, including our Chief Executive Officer and Chief Financial Officer.
The purpose of disclosure controls and procedures is to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to management, including our Chief Executive Officer and
Principal Financial Officer, to allow timely decisions regarding required
disclosures.


44




As previously disclosed under Item 4T,Controls and
Procedures,in our
Quarterly Report on Form 10-Q for the quarters ended June 30 and September 30,
2009, management indicated progress had been made during the quarter to
remediate material weaknesses in the internal control over financial reporting.
Based on those material weaknesses, our Chief Executive Officer and Principal
Financial Officer have concluded that, as of the year ended December 31, 2009,
disclosure controls and procedures were not effective. Nevertheless, based on a
number of factors, including the performance of additional procedures by
management designed to ensure the reliability of our financial reporting,
management believes that the financial statements in our Annual Report on
December 31, 2009 Form 10-K fairly presented, in all material respects, our
financial position, results of operations, and cash flows for the periods
presented in conformity with GAAP.





For the
period referenced above, the matters involving internal controls and procedures
that our management identified and considered to be material weaknesses were:
(1) lack of a functioning audit committee due to a lack of a majority of
independent members and a lack of outside directors on our board of directors,
resulting in ineffective oversight in the establishment and monitoring of
required internal controls and procedures; (2) inadequate staffing and
supervision that could lead to the untimely identification and resolution of
accounting and disclosure matters and failure to perform timely and effective
reviews, (3) limited documentation of our system of internal control, (4)
insufficient personnel to employ segregation of duties; (5) lack of formal
written policies and procedures for accounting and financial reporting with
respect to the requirements and application of U.S. GAAP and SEC disclosure
requirements and related documentation; (6) deficiencies in our material
technology systems and (7) ineffective controls over period end financial
disclosure and reporting processes. In addition, our corporate governance
activities and processes are not always formally documented or adequately
communicated.  Specifically, decisions made by the board to be carried out
by management should be documented and communicated on a timely basis to reduce
the likelihood of any misunderstandings regarding key decisions affecting our
operations and management.  These deficiencies and weaknesses were
largely attributable to the significant lack of available financial resources
and corresponding personnel reductions experienced by us during the quarter
ended September 30, 2009.





Management’
Remediation Initiatives





Although
management has not fully remediated the material weaknesses mentioned above,
management believes progress has been made during the year ended December 31,
2009.  We continued the engagement with a consulting firm specializing
in Sarbanes-Oxley Section 404 compliance to assist us in the implementation of
internal controls for financial reporting and disclosure and our remediation
efforts.  During the quarter the consulting firm completed an initial
entity level control evaluation (ELC), control documentation and gapanalysis for financial
close and reporting.  Following such evaluation, management
implemented a remediation plan during the quarter and addressed the
documentation of our internal controls, creation of policies and procedures,
control over period end financial disclosures and update of corporate governance
activities and documentation.  Management also expects to review
various facets of our information processing system, such as cash disbursements,
sales and billing, cash receipts and other procedures. We continue to evaluate
and address these weaknesses to ensure adherence to our policies, completeness
of reporting, segregation of incompatible duties and compliance with generally
accepted accounting principles; and we intend to continue to monitor and
evaluate these and other factors affecting our internal controls as our
available liquidity permits.  Until such time, our internal controls
over financial reporting may be subject to additional material weaknesses and
deficiencies that we have not yet identified. Management is responsible for and
is committed to achieving and maintaining a strong control environment, high
ethical standards, and financial reporting integrity.  This commitment
continues to be communicated to and reinforced with our employees.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Because of the inherent
limitations of internal control, there is a risk that material misstatements may
not be prevented or detected on a timely basis by internal control over
financial reporting. However, these inherent limitations are known features of
the financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.





Changes
in Internal Controls





Except as
indicated in the preceding paragraphs about management’s evaluation of
disclosure controls and procedures and internal controls, our management, with
the participation of our Chief Executive Officer and Chief Financial Officer,
has concluded there were no other significant changes in our internal controls
over financial reporting that occurred during our last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.




45




Limitations
on the Effectiveness of Controls





Our
management, including our CEO and CFO, does not expect that our Disclosure
Controls and internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management or board override
of the control.





The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.





CEO
and CFO Certifications





Appearing
after the Signatures section of this report there are Certifications of the CEO
and the CFO. The Certifications are required in accordance with Section 302 of
the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of
this report, which you are currently reading is the information concerning the
Evaluation referred to in the Section 302 Certifications and this information
should be read in conjunction with the Section 302 Certifications for a more
complete understanding of the topics presented.





Management’s
Report on Internal Control over Financial Reporting





The
management of Oragenics, Inc. is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f).  The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance to the
Company’s management and board of directors regarding the reliability of
financial reporting and the preparation of the financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.





The
Company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the Company;
and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial statements.





Because
of its inherent limitations, internal controls over financial reporting may not
prevent or detect misstatements.  All internal control systems, no
matter how well designed, have inherent limitations, including the possibility
of human error and the circumvention of overriding
controls.  Accordingly, even effective internal control over financial
reporting can provide only reasonable assurance with respect to financial
statement preparation.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Our
management, under the supervision of the CEO and CFO, assessed the effectiveness
of the Company’s internal control over financial reporting as of December 31,
2009.  In making this assessment, it used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated
Framework.  Based on our assessment, we believe that, as of
December 31, 2009, the Company’s internal control over financial reporting was
not effective based on those criteria.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.





ITEM  9B.   OTHER
INFORMATION.




At our
Annual Meeting of Shareholders held on October 28, 2009 our shareholders voted
on three proposals as follows:




46




Proposal
I Election of Directors





Our
shareholders elected each of the following four nominees as directors, each to
hold office until their successors are duly elected and qualified. The vote for
each director was as follows:





Nominee
                            
                            For
                            
                            WithheldChristine
      L. Koski
                            
                            
                            67,004,441
                            
                            692,057Robert
      C. Koski
                            
                            
                            67,004,421
                            
                            692,077Dr.
      Jeffrey D. Hillman
                            
                            
                            66,123,421
                            
                            1,573,077David
      B. Hirsch
                            
                            
                            66,123,421
                            
                            1,573,077





Proposal
II to approve an amendment to the Corporation’s Amended and Restated Articles of
Incorporation to increase the Corporation’s total number of authorized shares of
common stock from 100,000,000 shares,  par value $0.001 per share, to
300,000,000 shares, par value $0. 001 per share.





For
                            
                            Against
                            
                            Abstain65,785,299
                            
                            
                            1,908,799
                            
                            
                            2,400





Proposal
III Approval of the Company’s Second Amendment to its Amended and Restated 2002
Stock Option and Incentive Plan to increase the number of shares available from
5,000,000 to 12,500,000.




For
                    
                    Against
                    
                    Abstain58,849,241
                    
                    
                    1,266,695
                    
                    
                    7,580,562




PART
III





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.




Information
with respect to our directors and executive officers, the Audit Committee of the
Board of Directors, the Nomination Committee of the Board of Directors (known as
the Corporate Governance Committee), and the Audit Committee financial expert,
will be contained in our 2010 Proxy Statement. The 2010 Proxy Statement is
expected to be filed on or before April 30, 2009. Such information is
incorporated herein by reference.




Code
of Ethics




We have
adopted a code of ethics known as the Company Operating Principles, which is
applicable to all of our directors and employees, including our principal
executive officer and our principal financial officer. A copy of the Company
Operating Principles can be found on our website at www.oragenics.com. Any
possible future amendments to or waivers from the Company Operating Principles
will be posted on our website.




Section 16(a)
Beneficial Ownership Reporting Compliance




Information
regarding compliance with Section 16(a) of the Exchange Act is set forth
under the heading “Section 16(a) Beneficial Ownership Reporting Compliance”
will be in our 2010 Proxy Statement and is incorporated herein by
reference.





ITEM
11.  EXECUTIVE COMPENSATION.




The
information required by this Item 11 with respect to management remuneration and
transactions is incorporated herein by reference to our Proxy Statement under
the heading “Executive Compensation.”




47




ITEM12.SECURITYOWNERSHIPOFCERTAINBENEFICIALOWNERSANDMANAGEMENTANDRELATEDSTOCKHOLDER MATTERS.




The
information required by this Item 12 with respect to the security ownership of
certain beneficial owners and management is incorporated herein by reference to
our Proxy Statement under the heading “Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters.





Equity
Compensation Plan Information




We
maintain an equity-based compensation plan—the Amended and Restated 2002 Stock
Option and Incentive Plan (as amended, the “Incentive Plan”).  A
description of our equity based compensation plan can be found in Note 8 of the
Notes to Financial Statements. The Incentive Plan has been approved by our
shareholders. The following table sets forth the number of shares of our common
stock subject to outstanding options and rights under the Incentive Plan, the
weighted-average exercise price of outstanding options, and the number of shares
remaining available for future award grants under the Incentive Plan as of
December 31, 2009 (in thousands, except exercise price):




Equity
      Compensation Plan Information(a)
                              
                              
                              (b)
                              
                              
                              (c)Number
      of securitiesremaining
      available forNumber
      of securities to be
                              
                              
                              
                              
                              
                              future
      issunace under equityissued
      upon exercise of
                              
                              
                              Weighted-average
      exercise
                              
                              
                              compensation
      plansoutstanding
      options,
                              
                              
                              price
      of outstanding options,
                              
                              
                              (excluding
      securitiesPlan Category
                              
                              warrants and rights
                              
                              
                              warrants and rights
                              
                              
                              reflected in column (a))Equity
      compensation plans approved by security holders
                              
                              
                              7,719,300
                              
                              
                              $
                              0.35
                              
                              
                              
                              4,780,700Equity
      compensation plans not approved by security holders(1)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
                              
                              
                              7,719,300
                              
                              
                              $
                              0.35
                              
                              
                              
                              4,780,700
 (1) The
Company does not have any equity compensation plans that have not been approved
by security holders. The Company does have warrants to acquire 6,127,778 shares
of common stock outstanding at an a weighted average exercise price of $0.96 per
share




ITEM   13.  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.




The information required by this Item
13 with respect to transactions between us and certain related entities is
incorporated herein by reference to our Proxy Statement under the heading
“Certain Relationships.”





ITEM   14.  PRINCIPAL
ACCOUNTANT FEES AND SERVICES.




The
information required by this Item 14 is incorporated herein by reference to our
Proxy Statement under the heading “Principal Accountant Fees and
Services."




PART
IV




ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.





a)       The documents filed as part of this
report are as follows:




1. The
financial statements and accompanying report of independent registered public
accounting firm are listed in the Index to Financial Statements and are filed as
part of this report.




All
financial statement schedules are omitted because they are inapplicable, not
required or the information is included elsewhere in the financial statements or
the notes thereto.




2.
Exhibits required by Item 601 of Regulation S-K are submitted as a separate
section herein immediately following the “Exhibit Index”.




48




(b)       Other Exhibits




No
exhibits in addition to those previously filed or listed in item 15(a)
(2) and filed herein.





(c)       Not Applicable





SIGNATURES





Pursuant
to the requirements of Section 13 and 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this amended report to be signed on its
behalf by the undersigned, thereunto duly authorized.





Dated:  March
31, 2010





ORAGENICS, INC.(Registrant)By:
                  /s/ David B. HirschDavid
      B. Hirsch, President, Chief Executive
                    Officer
      and Principal Executive Officer
                    (DULY
      AUTHORIZED
OFFICER)




POWER
OF ATTORNEY




Each of
the undersigned officers and directors of Oragenics, Inc., hereby constitutes
and appoints David B. Hirsch, and Brian J. Bohunicky, each their true and lawful
attorneys-in-fact and agents, for them and in their name, place and stead, in
any and all capacities, to sign their names to any and all amendments to this
Report on Form 10-K, and other related documents, and to cause the same to
be filed with the Securities and Exchange Commission, granting unto said
attorneys, full power and authority to do and perform any act and thing
necessary and proper to be done in the premises, as fully to all intents and
purposes as the undersigned could do if personally present, and the undersigned
for himself hereby ratifies and confirms all that said attorney shall lawfully
do or cause to be done by virtue hereof.




Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Signature
            
            Title
            
            Date/s/ David B. Hirsch
            
            President,
      Chief Executive Officer (Principal Executive
            
            March
      31,David
      B. Hirsch
            
            Officer)  and
      Director
            
            2010/s/ Jeffrey D. Hillman
            
            
            
            March
      31,Jeffrey
      D. Hillman
            
            Chief Scientific Officer and
      Director
            
            2010/s/ Brian J. Bohunicky
            
            Chief
      Financial Officer (Principal Financial Officer and
            
            March
      31,Brian
      J. Bohunicky
            
            Principal
      Accounting Officer)
            
            2010/s/ Christine Koski
            
            Chairperson of the Board and
      Director
            
            March
      31,Christine
      Koski
            
            
            
            2010/s/ Robert Koski
            
            Director
            
            March
      31,Robert
      Koski
            
            
            
            2010





49





Oragenics,
Inc.




Financial
Statements




Years
ended December 31, 2009, 2008 and 2007




Index




Index
      to Financial Statements
              Pg
      F-1Report
      of Kirkland Russ Murphy & Tapp, P.A., Independent Registered Public
      Accounting Firm
              Pg
      F-2Audited
      Financial StatementsBalance
      Sheets
              Pg
      F-3Statements
      of Operations
              Pg
      F-4Statements
      of Changes in Shareholders’ Equity (Deficit)
              Pg
      F-5Statements
      of Cash Flows
              Pg
      F-6Notes
      to Financial Statements
              Pg
      F-7 – F-19





F-1





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and


Shareholders
of Oragenics, Inc.




We have
audited the accompanying balance sheets of Oragenics, Inc. (the Company) as of
December 31, 2009 and 2008, and the related statements of operations,
shareholders’ equity (deficit), and cash flows for the years ended December 31,
2009, 2008and 2007. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting.  Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion of the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Oragenics, Inc. as of December 31,
2009 and 2008, and the results of its operations and its cash flows for the
years ended December 31, 2009, 2008 and 2007 in conformity with accounting
principles generally accepted in the United States of America.




The
accompanying financial statements have been prepared assuming Oragenics, Inc.
will continue as a going concern.  As more fully described in Note 1,
the Company has incurred recurring operating losses, negative operating cash
flows and has an accumulated deficit.  These conditions raise
substantial doubt about the Company’s ability to continue as a going
concern.  Management’s plans in regard to these matters are also
described in Note 1.  The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.




March
      29, 2010
              /s/
      Kirkland Russ Murphy & Tapp, PAClearwater,
      Florida
              Certified
      Public Accountants





F-2





Oragenics, Inc.


Balance
Sheets


December
31, 2009 and 2008




2009
                        
                        
                        2008AssetsCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        301,592
                        
                        
                        
                        1,165,933Restricted
      cash
                        
                        
                        2,450,000
                        
                        
                        
                        -Accounts
      receivables, net
                        
                        
                        162,813
                        
                        
                        
                        6,286Inventory
                        
                        
                        132,112
                        
                        
                        
                        11,814Prepaid
      expenses and other current assets
                        
                        
                        80,839
                        
                        
                        
                        86,666Total
      current assets
                        
                        
                        3,127,356
                        
                        
                        
                        1,270,699Property
      and equipment, net
                        
                        
                        75,480
                        
                        
                        
                        323,424Total
      assets
                        
                        $
                        3,202,836
                        
                        
                        
                        1,594,123Liabilities
      and Shareholders' Equity (Deficit)Current
      liabilities:Accounts
      payable and accrued expenses
                        
                        $
                        478,111
                        
                        
                        
                        1,743,684Short
      term note payable
                        
                        
                        35,012
                        
                        
                        
                        27,687Deferred
      grant revenue
                        
                        
                        50,086
                        
                        
                        
                        -Total
      current liabilities
                        
                        
                        563,209
                        
                        
                        
                        1,771,371Shareholders'
      equity (deficit):Preferred
      stock, no par value; 20,000,000 shares authorized; none issued and
      outstanding
                        
                        
                        -
                        
                        
                        
                        -Common stock, $0.001 par value;
      300,000,000 and 100,000,000 shares authorized atDecember 31, 2009 and 2008,
      respectively; 106,083,149 and 38,316,585 sharesissued and outstanding at
      December 31, 2009 and December 31, 2008,
    respectively.
                        
                        
                        106,083
                        
                        
                        
                        38,316Additional
      paid-in capital
                        
                        
                        28,045,427
                        
                        
                        
                        19,776,971Accumulated
      deficit
                        
                        
                        (25,511,883
                        )
                        
                        
                        (19,992,535
                        )Total
      shareholders' equity (deficit)
                        
                        
                        2,639,627
                        
                        
                        
                        (177,248
                        )Total
      liabilities and shareholders' equity (deficit)
                        
                        $
                        3,202,836
                        
                        
                        
                        1,594,123




See
accompanying Report of Independent Registered Public Accounting Firm and notes
to the financial statements.




F-3





Oragenics, Inc.


Statements
of Operations


For the
Years Ended December 31, 2009, 2008 and 2007





Year Ended December 312009
                      
                      
                      2008
                      
                      
                      2007Revenue
                      
                      $
                      641,285
                      
                      
                      
                      233,539
                      
                      
                      
                      133,088Cost
      of sales
                      
                      
                      221,198
                      
                      
                      
                      14,864
                      
                      
                      
                      -Operating
      expenses:Research
      and development
                      
                      
                      1,833,746
                      
                      
                      
                      1,955,488
                      
                      
                      
                      1,569,551Selling,
      general and administration
                      
                      
                      4,917,844
                      
                      
                      
                      4,312,246
                      
                      
                      
                      902,655Total
      operating expenses
                      
                      
                      6,751,590
                      
                      
                      
                      6,267,734
                      
                      
                      
                      2,472,206Loss
      from operations
                      
                      
                      (6,331,503
                      )
                      
                      
                      (6,049,059
                      )
                      
                      
                      (2,339,118
                      )Other
      income (expense):Interest
      income
                      
                      
                      922
                      
                      
                      
                      32,511
                      
                      
                      
                      29,385Interest
      expense
                      
                      
                      (44,292
                      )
                      
                      
                      (10,054
                      )
                      
                      
                      -Gain
      (loss) on sale of property and equipment
                      
                      
                      22,743
                      
                      
                      
                      4,860
                      
                      
                      
                      (1,979
                      )Gain
      on extinguishment of payables
                      
                      
                      832,959
                      
                      
                      
                      -
                      
                      
                      
                      -Local
      business tax
                      
                      
                      (177
                      )
                      
                      
                      -
                      
                      
                      
                      -Total
      other income, net
                      
                      
                      812,155
                      
                      
                      
                      27,317
                      
                      
                      
                      27,406Loss
      before income taxes
                      
                      
                      (5,519,348
                      )
                      
                      
                      (6,021,742
                      )
                      
                      
                      (2,311,712
                      )Net
      loss
                      
                      $
                      (5,519,348
                      )
                      
                      
                      (6,021,742
                      )
                      
                      
                      (2,311,712
                      )Basic
      and diluted net loss per share
                      
                      $
                      (0.09
                      )
                      
                      
                      (0.17
                      )
                      
                      
                      (0.09
                      )Shares
      used to compute basic and diluted net loss per share
                      
                      
                      64,883,774
                      
                      
                      
                      35,069,261
                      
                      
                      
                      25,092,183




See
accompanying Report of Independent Registered Public Accounting Firm and notes
to the financial statements.




F-4





Organics, Inc.


Statements
of Changes in Shareholders' Equity (Deficit)


For the
Years Ended December 31, 2009, 2008 and 2007




Common Stock
                        
                        
                        Additional
                        
                        
                        
                        
                        
                        TotalPaid In
                        
                        
                        Accumulated
                        
                        
                        Shareholders'Shares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Deficit
                        
                        
                        Equity (Deficit)Balances
      at December 31, 2006
                        
                        
                        22,404,943
                        
                        
                        $
                        22,405
                        
                        
                        $
                        12,914,950
                        
                        
                        $
                        (11,659,081
                        )
                        
                        $
                        1,278,274Exercise
      of common stock warrants
                        
                        
                        997,500
                        
                        
                        
                        997
                        
                        
                        
                        599,502
                        
                        
                        
                        -
                        
                        
                        
                        600,499Issuance
      of common stock and warrants
                        
                        
                        4,600,000
                        
                        
                        
                        4,600
                        
                        
                        
                        1,086,751
                        
                        
                        
                        -
                        
                        
                        
                        1,091,351Compensation
      expense relating to option issuances
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        161,471
                        
                        
                        
                        -
                        
                        
                        
                        161,471Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,311,712
                        )
                        
                        
                        (2,311,712
                        )Balances
      at December 31, 2007
                        
                        
                        28,002,443
                        
                        
                        $
                        28,002
                        
                        
                        $
                        14,762,674
                        
                        
                        $
                        (13,970,793
                        )
                        
                        $
                        819,883Exercise
      of common stock warrants
                        
                        
                        4,536,364
                        
                        
                        
                        4,536
                        
                        
                        
                        1,991,464
                        
                        
                        
                        -
                        
                        
                        
                        1,996,000Issuance
      of common stock and warrants
                        
                        
                        5,777,778
                        
                        
                        
                        5,778
                        
                        
                        
                        2,509,222
                        
                        
                        
                        -
                        
                        
                        
                        2,515,000Compensation
      expense relating to option issuances
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        513,611
                        
                        
                        
                        -
                        
                        
                        
                        513,611Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (6,021,742
                        )
                        
                        
                        (6,021,742
                        )Balances
      at December 31, 2008
                        
                        
                        38,316,585
                        
                        
                        $
                        38,316
                        
                        
                        $
                        19,776,971
                        
                        
                        $
                        (19,992,535
                        )
                        
                        $
                        (177,248
                        )Exercise
      of common stock options and warrants
                        
                        
                        1,200,000
                        
                        
                        
                        1,200
                        
                        
                        
                        118,800
                        
                        
                        
                        -
                        
                        
                        
                        120,000Issuance
      of common stock and warrants, net of expenses
                        
                        
                        66,566,564
                        
                        
                        
                        66,567
                        
                        
                        
                        7,757,527
                        
                        
                        
                        -
                        
                        
                        
                        7,824,094Compensation
      expense relating to option issuances
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        392,129
                        
                        
                        
                        -
                        
                        
                        
                        392,129Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (5,519,348
                        )
                        
                        
                        (5,519,348
                        )Balances
      at December 31, 2009
                        
                        
                        106,083,149
                        
                        
                        $
                        106,083
                        
                        
                        $
                        28,045,427
                        
                        
                        $
                        (25,511,883
                        )
                        
                        $
                        2,639,627




See
accompanying Report of Independent Registered Public Accounting Firm and notes
to the financial statements.


F-5





Oragenics,
Inc.
 Statements
of Cash Flows
 For the
Years Ended December 31, 2009, 2008 and 2007
  Year
      Ended December 312009
                                                
                                                
                                                2008
                                                
                                                
                                                2007Cash
      flows from operating activities:Net
      loss
                                                
                                                $
                                                (5,519,348
                                                )
                                                
                                                
                                                (6,021,742
                                                )
                                                
                                                
                                                (2,311,712
                                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Non-cash
      bonus paid in common stock
                                                
                                                
                                                100,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Non-cash
      services paid in common stock
                                                
                                                
                                                115,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Non-cash
      settlement of amounts owed to employees
                                                
                                                
                                                113,439
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Depreciation
      and amortization
                                                
                                                
                                                239,760
                                                
                                                
                                                
                                                253,857
                                                
                                                
                                                
                                                273,230Stock-based
      compensation expense
                                                
                                                
                                                392,129
                                                
                                                
                                                
                                                513,611
                                                
                                                
                                                
                                                161,471Gain
      on extinguishment of payables
                                                
                                                
                                                (832,959
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -(Gain)
      loss on sale of property and equipment
                                                
                                                
                                                (22,743
                                                )
                                                
                                                
                                                (4,860
                                                )
                                                
                                                
                                                1,979Changes
      in operating assets and liabilities:Accounts
      receivable, net
                                                
                                                
                                                (156,527
                                                )
                                                
                                                
                                                (6,286
                                                )
                                                
                                                
                                                -Inventory
                                                
                                                
                                                (120,298
                                                )
                                                
                                                
                                                (11,814
                                                )
                                                
                                                
                                                -Prepaid
      expenses and other current assets
                                                
                                                
                                                128,939
                                                
                                                
                                                
                                                29,854
                                                
                                                
                                                
                                                (42,649
                                                )Accounts
      payable and accrued expenses
                                                
                                                
                                                (286,959
                                                )
                                                
                                                
                                                1,412,190
                                                
                                                
                                                
                                                3,921Deferred
      grant revenue
                                                
                                                
                                                50,086
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Net
      cash used in operating activities
                                                
                                                
                                                (5,799,481
                                                )
                                                
                                                
                                                (3,835,190
                                                )
                                                
                                                
                                                (1,913,760
                                                )Cash
      flows from investing activities:Purchase
      of property and equipment, net
                                                
                                                
                                                (9,073
                                                )
                                                
                                                
                                                (55,322
                                                )
                                                
                                                
                                                (12,906
                                                )Proceeds
      from sale of property and equipment, net
                                                
                                                
                                                40,000
                                                
                                                
                                                
                                                42,250
                                                
                                                
                                                
                                                3,046Net
      cash (used in) provided by investing activities
                                                
                                                
                                                30,927
                                                
                                                
                                                
                                                (13,072
                                                )
                                                
                                                
                                                (9,860
                                                )Cash
      flows from financing activities:Borrowings
      under short term note payable
                                                
                                                
                                                100,000
                                                
                                                
                                                
                                                79,518
                                                
                                                
                                                
                                                -Borrowings
      under long term note payable
                                                
                                                
                                                1,000,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Payments
      on short term note payable
                                                
                                                
                                                (215,787
                                                )
                                                
                                                
                                                (51,831
                                                )
                                                
                                                
                                                -Net
      proceeds from issuance of common stock
                                                
                                                
                                                6,470,000
                                                
                                                
                                                
                                                4,511,000
                                                
                                                
                                                
                                                1,691,850Restricted
      cash from common stock issuance proceeds
                                                
                                                
                                                (2,450,000
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Net
      cash provided by financing activities
                                                
                                                
                                                4,904,213
                                                
                                                
                                                
                                                4,538,687
                                                
                                                
                                                
                                                1,691,850Net
      increase (decrease) in cash and cash equivalents
                                                
                                                
                                                (864,341
                                                )
                                                
                                                
                                                690,425
                                                
                                                
                                                
                                                (231,770
                                                )Cash
      and cash equivalents at beginning of year
                                                
                                                
                                                1,165,933
                                                
                                                
                                                
                                                475,508
                                                
                                                
                                                
                                                707,278Cash
      and cash equivalents at end of year
                                                
                                                $
                                                301,592
                                                
                                                
                                                
                                                1,165,933
                                                
                                                
                                                
                                                475,508Interest
      paid
                                                
                                                $
                                                25,915
                                                
                                                
                                                
                                                10,054
                                                
                                                
                                                
                                                -Non-cash
      investing and financing activities:Issuance
      of common stock to employees assettlement
      of amounts owed
                                                
                                                $
                                                32,556
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Borrowings
      under short term notespayable
      for prepaid expense
                                                
                                                $
                                                123,112
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Long-term
      note payable converted intocommon
      stock
                                                
                                                $
                                                1,000,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
  See
accompanying Report of Independent Registered Public Accounting Firm and notes
to the financial statements.
  F-6




Oragenics,
Inc.


Notes to
Financial Statements


December
31, 2009 and 2008




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 focused on the discovery, development and commercialization of a
variety of technologies associated with oral health, broad spectrum antibiotics
and other general health benefits.




Basis
of Presentation


The
accompanying financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
(GAAP) including the assumption of a going concern basis which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business.  The Company incurred a net loss of
$5,519,348 for the year ended December 31, 2009 and as of that date had an
accumulated deficit of $25,511,883.  Cash used in operations for the
year ended December 31, 2009 was $5,799,481 and cash flow from operations
was negative throughout 2009.  The Company expects to incur
substantial expenditures to further develop each of its
technologies.  The Company believes the working capital at December
31, 2009 will be sufficient to meet the business objectives as presently
structured through June 2010.   Management recognizes that the
Company must generate additional capital resources or consider modifications to
its technology development plans to enable it to continue as a going
concern.  Management’s plans include seeking financing, alliances or
other partnership agreements with entities interested in the Company’s
technologies, or other business transactions that would generate sufficient
resources to assure continuation of the Company’s operations and research and
development programs.




The
Company intends to seek additional funding through sublicensing arrangements,
joint venturing or partnering, sales of rights to technology, government grants
and public or private financings. The Company’s future success depends on its
ability to raise capital and ultimately generate revenue and attain
profitability. The Company cannot be certain that additional capital, whether
through selling additional debt or equity securities or obtaining a line of
credit or other loan, will be available to it or, if available, will be on terms
acceptable to the Company. If the Company issues additional securities to raise
funds, these securities may have rights, preferences, or privileges senior to
those of its common stock, and the Company’s current shareholders may experience
dilution. If the Company is unable to obtain funds when needed or on acceptable
terms, the Company may be required to curtail their current development
programs, cut operating costs and forego future development and other
opportunities. Without sufficient capital to fund their operations, the Company
will be unable to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.




Recently
Adopted Accounting Pronouncements




In August
2009, the FASB issued ASU 2009-05, “Fair Value Measurements and Disclosures (ASC
Topic 820) — Measuring Liabilities at Fair Value” (“Update 2009-05”).
Update 2009-05 provides clarification regarding valuation techniques when a
quoted price in an active market for an identical liability is not available in
addition to treatment of the existence of restrictions that prevent the transfer
of a liability. Update 2009-05 also clarifies that both a quoted price in an
active market for an identical liability at the measurement date and the quoted
price for an identical liability when traded as an asset in an active market
(when no adjustments to the quoted price of the asset are required) are
Level 1 fair value measurements. This standard is effective for the first
reporting period, including interim periods, beginning after issuance. Adoption
of Update 2009-05 did not have a material effect on Company’s financial
statements.




On
July 1, 2009 the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codificationtm
(“ASC”) became the authoritative source of accounting principles to be applied
to financial statements prepared in accordance with U.S. Generally Accepted
Accounting Principles (“GAAP”). In accordance with the ASC, citations to
accounting literature in this report are to the relevant topic of the ASC or are
presented in plain English. This standard is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Company adopted this standard at its effective date.




New
Accounting Pronouncements




In June
2003, the SEC adopted final rules under Section 404 of the Sarbanes-Oxley Act of
2002 (“Section 404”), as amended, by SEC Release No. 33-8760 on December 15,
2006.  Commencing with the Company’s annual report for the year ended
December 31, 2007, the Company is required to include a report of management on
the Company’s internal control over financial reporting.  The internal
control report must include a statement of management’s responsibility for
establishing and maintaining adequate internal control over financial reporting
for the Company; of management’s assessment of the effectiveness of the
Company’s internal control over financial reporting as of year-end; and of the
framework used by management to evaluate the effectiveness of the Company’s
internal control over financial reporting.  Furthermore, beginning
with the Company’s annual report for fiscal year 2010, the Company is required
to file the auditor’s attestation report separately on the Company’s internal
control over financial reporting on whether it believes that the Company has
maintained, in all material respects, effective internal control over financial
reporting.


F-7




Oragenics,
Inc.


Notes to
Financial Statements (continued)


December
31, 2009 and 2008




In
October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic
605) — Multiple-Deliverable Revenue Arrangements.” ASU No. 2009-13
addresses the accounting for multiple-deliverable arrangements to enable vendors
to account for products or services (deliverables) separately rather than as a
combined unit. This guidance establishes a selling price hierarchy for
determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or
(c) estimates. This guidance also eliminates the residual method of
allocation and requires that arrangement consideration be allocated at the
inception of the arrangement to all deliverables using the relative selling
price method. In addition, this guidance significantly expands required
disclosures related to a vendor’s multiple-deliverable revenue arrangements. ASU
No. 2009-13 is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15,
2010 and early adoption is permitted. A company may elect, but will not be
required, to adopt the amendments in ASU No. 2009-13 retrospectively for
all prior periods. Management is currently evaluating the requirements of ASU
No. 2009-13 and has not yet determined the impact on the Company’s
consolidated financial statements.




Use
of Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.  The principal areas of estimation reflected in the
financial statements are stock based compensation, valuation of warrants, sales
returns and allowances and allowance for doubtful accounts.





Fair
Value of Financial Instruments




The fair
value of the Company’s cash and cash equivalents, accounts payable and accrued
expenses approximate their carrying values due to their short-term
nature.




Cash
and Cash Equivalents




Cash and
cash equivalents consist of all cash balances and highly liquid investments with
an original maturity of three months or less.  The Company’s cash and
cash equivalents are deposited in a financial institution and consist of demand
deposits and overnight repurchase agreement investments and at times deposits
are in excess of federally insured limits.




Restricted
Cash




As of
December 31, 2009, the Company had $2,450,000 of cash that was restricted and
held in escrow for three days pursuant to the Common Stock Purchase Agreement
dated December 30, 2009.  On January 2, 2010, $1,450,000 was released
from restrictions. In accordance with this agreement, the Company shall reserve
and allocate $1,000,000 of the proceeds from this common stock sale solely to
the expenses incurred in the further development of the Company’s DPOLT
synthetic chemistry platform.




Accounts
Receivable




Accounts
receivable are recorded at their net realizable value and consist of trade
receivables from the sale of product to customers.  Management
analyzes accounts receivable on a regular basis and determines the
collectability based on the facts and circumstances relating to each
customer.  The Company does not have a history of accounts receivable
or write offs, therefore, the Company estimated their allowance for doubtful
accounts based on sales trend.  As of December 31, 2009 and 2008, the
Company has recorded an allowance for doubtful accounts of $5,410 and $0,
respectively.




Inventory




Inventories
are stated at the lower of cost or market.  Cost, which includes
material, labor and overhead, is determined on a first-in, first-out
basis.




Property
and Equipment




Property
and equipment is stated at cost less accumulated depreciation and amortization.
Depreciation is provided on the straight-line method over the estimated useful
lives of the assets (three to seven years). Leasehold improvements are amortized
over the shorter of the estimated useful life or the lease term of the related
asset (five years).


F-8






Oragenics,
Inc.


Notes to
Financial Statements (continued)


December
31, 2009 and 2008




Business
Segments




In
accordance with GAAP, the Company is required to report segment information. As
the Company only operates principally in one business segment, no additional
reporting is required.




Stock-Based
Compensation




GAAP
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their grant
date fair values. Stock-based compensation expense is recorded over the
requisite service period in which the employee or non-employee provides services
to Oragenics, to the extent the options or warrants do not vest at the grant
date and are not subject to forfeiture.





Net
Loss Per Share




During
all periods presented, the Company had securities outstanding that could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted net loss per share, as their effect would have
been antidilutive. Because the Company reported a net loss for all periods
presented, shares associated with the stock options and warrants are not
included because they are antidilutive. Basic and diluted net loss per share
amounts are the same for the periods presented. Net loss per share is computed
using the weighted average number of shares of common stock
outstanding.




Revenue
Recognition


The
Company recognizes revenue from the sales of product when title and risk of loss
pass to the customer, which is generally when the product is shipped. Grant
revenues are recognized as the reimbursable expenses are incurred over the life
of the related grant.  Grant revenues are deferred when reimbursable
expenses have not been incurred.





The
Company records allowances for discounts and product returns at the time of
sales as a reduction of revenue as such allowances can be reliably estimated
based on historical experience or known trends.  Product returns are
limited to specific mass retail customers for expiration of shelf life or unsold
product over a period of time.




Impairment
of Long-Lived Assets




The
Company periodically reviews their long-lived assets for impairment and reduces
the carrying value to fair value whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. There were no
impairment losses recorded during the years ended December 31, 2009, 2008
and 2007.




Advertising
Expenses




The
Company’s policy is to expense advertising and marketing costs as
incurred.  For the years ended December 31, 2009, 2008 and 2007,
advertising and marketing expense was $421,038, $45,308 and $0,
respectively.




Research
and Development Expenses




Expenditures
for research and development are expensed as incurred.




Income
Taxes




Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax
credit carryforwards.




Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rate is   recognized in operations
in the period that includes the enactment date. Deferred tax assets are reduced
to estimated amounts expected to be realized by the use of a valuation
allowance.




Concentrations




The
Company is dependent on three key suppliers to provide probiotics, blending and
packaging of it’s EvoraPlus, EvoraPlus Kids and Teddy's Pride
products.


F-9




Oragenics,
Inc.


Notes to
Financial Statements (continued)


December
31, 2009 and 2008




2.
Inventory




Inventory
consists of the following as of December 31, 2009 and 2008:




2009
                      
                      
                      2008Finished
      goods
                      
                      $
                      77,826
                      
                      
                      $
                      11,814Work-in-process
                      
                      
                      27,286
                      
                      
                      
                      -Raw
      materials
                      
                      
                      27,000
                      
                      
                      
                      -Total
      inventory
                      
                      $
                      132,112
                      
                      
                      $
                      11,814




3.
Property and Equipment, net




Property
and equipment, net consists of the following as of December 31, 2009 and
2008:




2009
                    
                    
                    2008Furniture
      and fixtures
                    
                    $
                    17,109
                    
                    
                    $
                    8,035Laboratory
      equipment
                    
                    
                    804,279
                    
                    
                    
                    825,193Leasehold
      improvements
                    
                    
                    476,777
                    
                    
                    
                    481,606Office
      and computer equipment
                    
                    
                    33,908
                    
                    
                    
                    82,9151,332,073
                    
                    
                    
                    1,397,749Accumulated
      depreciation and amortization
                    
                    
                    (1,256,593
                    )
                    
                    
                    (1,074,325
                    )Property
      and equipment, net
                    
                    $
                    75,480
                    
                    
                    $
                    323,424





Depreciation
and amortization expense for the years ending December 31, 2009, 2008, and 2007
were $239,760, $253,857 and $273,230 respectively.




4.
Related Party Transactions




At
December 31, 2009 deferred payments totaling $34,000 were owed to former
directors in connection with their service on our Board and are included in the
accompanying balance sheet in accrued expenses as of December 31, 2009.
Thesemeeting fees
were deferred until such time as management determines that we have
sufficient funding to pay them to the former directors.   The
deferrals of payments toour former
directors, do not reduce our expenses, but serve to preserve our limited cash
resources to the extent necessary to maintain our operations.  These
amounts are non-interest bearing.




At
December 31, 2008 deferred payments totaling $143,583 were owed to Jeffrey D.
Hillman, David Hirsch, Stanley Stein and $34,000 to the former directors and are
included in the accompanying balance sheet in accounts payable and accrued
expenses as of December 31, 2008.  Amounts were repaid through stock
issuances or cash payments during 2009, excluding $34,000 due to former
directors which remain outstanding as of December 31, 2009.




5.
Accounts Payable and Accrued Expenses





2009
                                
                                
                                2008Accounts
      payable trade
                                
                                $
                                194,025
                                
                                
                                $
                                493,599Legal
      fees
                                
                                
                                107,656
                                
                                
                                
                                909,881Vacation
                                
                                
                                88,473
                                
                                
                                
                                65,907Deferred
      compensation
                                
                                
                                34,000
                                
                                
                                
                                143,583Royalties
      payable
                                
                                
                                25,000
                                
                                
                                
                                50,000Interest
                                
                                
                                18,377
                                
                                
                                
                                -Other
                                
                                
                                6,291
                                
                                
                                
                                10,714Consulting
      fees
                                
                                
                                4,289
                                
                                
                                
                                70,000Total
      accounts payable and accrued expenses
                                
                                $
                                478,111
                                
                                
                                $
                                1,743,684


F-10


Oragenics,
Inc.


Notes to
Financial Statements (continued)


December
31, 2009 and 2008





Accounts
payable and accrued expenses as of December 31, 2009 and 2008 were $478,111 and
$1,743,684, respectively.  Excluding accounts payable trade, legal
fees represent the most significant expense totaling $107,656 as of December 31,
2009 and $909,881 as of December 31, 2008.  In 2009, accrued legal
fees are primarily for general counsel and patent work.  The fees
incurred during 2008 supported legal activities related to the delisting from
the NYSE Alternext US (formerly known as the American Stock Exchange), listing
on the Alternext – Paris exchange, requirements for trading on the
Over-the-Counter (OTC) Bulletin Board and global expansion activities in Mexico
and France.  During 2009, the Company recorded $832,959 of
extinguished accounts payable due to the  reduction in payments owed
to several creditors following the June 29, 2009 financing
transaction.





6.
Short Term Note Payable





On August
6, 2009 the Company entered into a short term note payable for $70,025 with an
interest rate of 5.75% to finance directors and officers liability
insurance.  This note matures on May 24, 2010.  At December
31, 2009 the balance due was $35,012.





On April
15, 2009 we entered into a loan agreement with an accredited investor
for a short term note in the amount, of $100,000.  On August 21,
2009 we paid the short term note and outstanding accrued interest in
full.  The note included an interest rate of 15% per annum
and its maturity date was April 15, 2011.  In connection with this
borrowing we also issued warrants to acquire 100,000 shares of our
common stock at an exercise price of $.50 per share and such warrants are
exercisable for five years.  The fair value of the warrants was
determined to be immaterial by the Company.





In March
2009,the Company
entered into a short term note payable for $53,087 with an interest rate of
5.75% to finance product liability insurance.  This note matures on
January 10, 2010.  At December 31, 2009 the balance was paid
off.





The
Company entered into a short term note payable in June of 2008 with an interest
rate of 5.75% to finance D&O and employment related practices liability
insurance at December 31, 2008, the balance due was $27,687. The amount was paid
off as of April 30, 2009.





7.
Line of Credit




There
were no lines of credit established by the Company during 2009.


The
Company opened a Line of Credit with Signature Bank, NY during
2008.  The line of credit was established for short term loans for
working capital purposes, provided the aggregate principal amount of loans at
any time outstanding would not exceed $1,000,000.  Signature Bank was
entitled to receive interest at a fluctuating rate per annum equal to the Prime
Rate and the interest rate was subject to change as the Prime Rate
changes.  The Company agreed to pay the Bank an additional
compensation facility fee in the amount of $10,000 which was payable upon the
Company’s acceptance.  The Line of Credit was fully secured by the
Company’s Signature Bank Fidelity Prime Fund money market.  As of
December 31, 2008 there were no amounts outstanding on the line of
credit.  The Company canceled the line of credit on January 24, 2009
without ever drawing upon it.




8.
Shareholders’ Equity




Common
Stock




On
August 7, 2007, our Securities Purchase Agreement with accredited
investors, including a former director, became binding and we closed on
$1,171,591 in equity based financing. We issued a total of 4,600,000 shares of
restricted common stock in the private placement. The shares were sold to
accredited investors at $0.25 per share, except that per the exchange listing,
our former director acquired his shares at $0.44 per share, which was the
closing share price on August 7, 2007. Each participating investor also
received warrants to purchase shares of common stock at the price of $0.58 per
share. One warrant was issued for each share of common stock issued for a total
of up to 4,600,000 shares that may be acquired upon exercise of the warrants.
The warrants became exercisable in February, 2008 and expired on August 7, 2007
after one year from the date of issuance.




On June
12, 2008, we issued an aggregate of 5,777,778 shares of common stock accredited
to investors, including an affiliate, George T. Hawes at a price of $0.45 per
share pursuant to a private offering of the Company’s stock.  Net
proceeds of $2,515,000 were received from this private offering.




In
November, 2008, the Company began the process of listing on the NYSE Euronext
Alternext Paris exchange.  We were sponsored by Bryan Garnier, a
European investment banking firm.  We were approved in early December,
and on Monday, December 15, 2008, trading of the Company’s shares on Alternext
Paris commenced.


F-11


Oragenics,
Inc.


Notes to
Financial Statements (continued)


December
31, 2009 and 2008





On
December 10, 2008, the Company received notice from NYSE Alternext US LLC
(formerly known as the American Stock Exchange* hereinafter the "Exchange" or
"Alternext US") that the Listings Qualifications Panel of the Exchange's
Committee on Securities (the "Panel"), denied the Company's appeal and affirmed
the Staff's previous decision to delist the Company's common stock. The notice
from the Exchange indicated that the Panel agreed with the Staffs determination
that the Company did not meet the continued listing standards under the
Alternext US Company Guide: Section 1003(a)(ii) in that the Company's
shareholders' equity is less than $4 million and it has sustained losses in
three of its four most recent fiscal years.   Accordingly, the
delisting became effective at the close of market on December 19,
2008.  On Monday, December 22, 2008, quotations for the Company’s
shares became available on the Over-the-Counter (OTC) Bulletin Board under the
ticker symbol ORNI. Quotes became available, among other places, on the OTCBB
website www.otcbb.com.





On May 4,
2009 and June 10, 2009, we borrowed $32,556 and $13,100, respectively,
from Dr. Jeffery Hillman, our founder, Chief Science Officer and
director.  These borrowings were to be repaid upon demand by Dr. Hillman,
were unsecured and did not bear interest.  The proceeds from
these borrowings were used to purchase inventory for our Consumer
Healthcare products division.  On June 29, 2009 the aggregate amount
of these obligations of $45,656 were repaid by us in full through the issuance
of 456,564 shares of our common stock at a price of $.10 per share, which was
the closing price of our common stock on June 29, 2009.





On June
29, 2009, we successfully entered into and consummated a private placement of
equity and debt financing pursuant to a Securities Purchase Agreement with an
accredited investor (the “June 2009 Private Placement”). Pursuant to the terms
of the Securities Purchase Agreement the Company issued 50,000,000 shares of its
Common Stock to the Koski Family Limited Partnership (“KFLP”) and issued
warrants to the KFLP to acquire 1,000,000 shares of Company common stock at an
exercise price of $0.10 per share in exchange for $4,000,000, the payment of
which consisted of the following: $1,500,000 in cash at closing and $2,500,000
pursuant to a non-interest bearing promissory note providing for five
consecutive monthly installment payments of $500,000 commencing July 31, 2009
and the KFLP provided a secured convertible loan of $1,000,000 to the Company.
The loan is secured by substantially all of the Company’s assets (excluding
receivables) and bears interest at the rate of Prime plus 4.0% which is payable
quarterly. The principal of the loan is due in five years. The warrants expire
in five years and are immediately exercisable. Immediately following the closing
of the aforementioned June 2009 Private Placement, our Chief Executive Officer
Mr. Hirsch was awarded a bonus of $100,000 which was paid in 1,000,000 shares of
our common stock at a price per share of $0.10. We issued 250,000 shares of our
common stock to our newly appointed Chief Financial Officer for deferred
compensation we owed to him and we issued 343,750 shares of our common stock to
another employee for deferred compensation we owed to him.





As a
result of the transaction the board of directors believes there was a change of
control of the Company with the KFLP acquiring a controlling interest of
approximately 56.6 % of our outstanding voting common stock.  Two
Koski family members, Robert C. Koski and Christine L. Koski were appointed to
our Board of Directors.  In addition, following the transaction, the
KFLP also has the ability to consent to the selection and appointment of two
outside directors.




The KFLP
was also granted registration rights in connection with any offerings by the
Company of its shares.  Such registration rights require the Company
to include a certain amount of the KFLP shares in a Company offering determined
based upon 15% of the shares to be publicly offered.




In
connection with, and as a condition to the Securities Purchase Agreement, the
purchasers, including George Hawes our largest shareholder prior to this
transaction, under that certain securities purchase agreement dated June 12,
2008, (the “Hawes Agreement”) entered into waiver and release agreements with
us.  In addition, such individuals waived and relinquished any special
rights they possessed pursuant to agreements with the Company, including, but
not limited to, (i) rights of first refusal (ii) antidilution regarding future
equity sales and (iii) covenants regarding secured lending.  In
connection with such waivers and releases, warrants to acquire 3,220,000 shares
of our common stock at an exercise price of $1.30 per share that were previously
issued under the Hawes Agreement were subject to the right of exchange for new
replacement warrants to acquire the same number of shares under the same terms
except for a change in the exercise price from $1.30 to $0.75.




In
addition to the above, as a further condition to the consummation of the
transaction contemplated by the Securities Purchase Agreement the Company was
required to obtain satisfactory arrangements with three main creditors for
reductions in the amounts payable by the Company to such
creditors.  As of June 29, 2009 the agreed upon reductions in accounts
payable with such creditors amounted to $707,674 in aggregate and the reductions
were conditioned upon prompt payment of the remaining balances owed to such
creditors after taking into account the reductions agreed to by such
creditors.  Further reductions to amounts owed to creditors were
agreed to during the three months ending December 31, 2009 in the amount of
$79,017.  The total amount of reductions for the year ending December
31, 2009 was $832,959 which was recorded as a gain on extinguishment of payables
and reported as Other Income.




F-12




Oragenics,
Inc.


Notes to
Financial Statements (continued)


December
31, 2009 and 2008





In
September 2009, the Company issued 500,000 shares of restricted common stock to
Media4Equity LLC (“M4E”) pursuant to an agreement with M4E effective September
3, 2009 whereby M4E will provide consulting services to us with respect to
national media exposure of placements of print and radio
features.  The agreement also requires us to pay a monthly fee to M4E
of $10,000 during the three year term of the agreement, subject to certain
termination rights.  The shares of common stock have a fair market
value of $115,000 based on a price of $0.23 per share.  This amount is
included in selling, general and administrative expenses in the accompanying
2009 statement of operations.




On
October 28, 2009 at our annual shareholder meeting our proposal to amend the
Company’s articles of incorporation to increase the authorized shares of common
stock from 100,000,000 to 300,000,000 was approved by shareholders and the
amendment to our articles of incorporation was filed with the Florida Department
of State.  In addition, at our annual meeting our shareholders also
approved a second amendment to our Amended and Restated 2002 Stock Option and
Incentive Plan to increase the shares available for grant thereunder from
5,000,000 to 12,500,000.





On
December 30th, 2009,
we completed the initial closing of a private placement of equity pursuant to a
Common Stock Purchase Agreement with accredited investors (the “December 2009
Private Placement”). The Company issued 10,016,250 shares of its Common Stock at
a price of $0.25 per share to the investors for $2,504,062, the payment of which
consisted of the following: $2,450,000 in cash at closing and $54,062 pursuant
to the cancellation of the same dollar amount of outstanding deferred
compensation obligation owed by the Company to Dr. Jeffrey Hillman.
Approximately half of the total investment, or $1,250,000, was made by the Koski
Family Limited Partnership (the "KFLP"). In conjunction with, and as a condition
to the initial closing of the December 2009 Private Placement, the KFLP was
issued 4,000,000 shares of the Company's Common Stock at $0.25 per share, which
was the same price per share paid by the investors, in exchange for the
cancellation of its $1,000,000 secured note. The loan originally had been
secured by substantially all of the Company's assets (excluding receivables) and
required interest payments at the rate of Prime plus 4.0% which were payable
quarterly. The transaction was consummated pursuant to, and in reliance upon, an
exemption from registration set forth under Section 4(2) of the Securities Act
of 1933 as amended, as this transaction did not involve a public
offering.





Contemporaneously
with the December 2009 Private Placement contemplated by the Common Stock
Purchase Agreement, the KFLP also elected to exercise previously issued warrants
(issued on June 30, 2009) to purchase 1,000,000 shares of Company Common Stock.
The warrants were exercised through the payment by the KFLP of the warrant
exercise price of $0.10 per share. Additionally, Christine L. Koski and Robert
C. Koski, as Directors of the Company, each exercised previously issued options
to purchase 100,000 shares of the Company's Common Stock at the option exercise
price of $0.10 per share. These options were automatically granted to both
Christine and Robert Koski when they became non-employee directors of the
Company on June 30, 2009.





Warrants




On December 14,
2005, we issued a total of 2,937,500 shares of our common stock and warrants to
purchase 2,937,500 shares of our common stock in a private placement to
accredited investors. We received gross proceeds of $1,175,000 in the private
placement and incurred estimated costs of approximately $70,000 resulting in net
proceeds of approximately $1,105,000. 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. During 2007, a total of 997,500
warrants were exercised that provided $478,500 in additional working capital and
following the call of the warrants no further warrants associated with the
private placement remain outstanding.





On
January 11, 2008 the Company approved an amendment to the outstanding warrants
that were originally issued in connection with the Company’s private placement
on March 6, 2006.  The warrants were to expire on February 8, 2008 and
the Board of Directors determined it would be in the best interest of the
Company to amend the exercise price from $0.60 to $0.44 for the balance of the
remaining term.  The outstanding warrants totaled 1,500,000 shares of
common stock.  On February 8, 2008, we issued an aggregate of
1,150,000 shares of common stock to warrant holders in connection with their
exercise of the warrants at a reduced price of $0.44.  The warrants
were originally issued to accredited investors in connection with our March 6,
2006 private placement.  The 350,000 remaining unexercised warrants
expired as of February 8, 2008 in accordance with the terms of the
warrants.  Proceeds of $506,000 were received by us from the exercise
of the warrants.  As holders of these outstanding warrants, Jeffery
Hillman, our Chief Science Officer; Robert Zahradnik, our former Chief Operating
Officer; and an affiliate, George Hawes; acquired 62,500 shares, 62,500 shares
and 737,500 shares, respectively.


F-13





Oragenics,
Inc.


Notes to
Financial Statements (continued)


December
31, 2009 and 2008





On
January 29, 2008 the Company approved an amendment to the outstanding warrants
that were originally issue in connection with the Company’s private placement on
August 7, 2007.  The original warrants that totaled 4,600,000 shares
of common stock and expire on





August 7,
2008, were amended prior to expiration by the Board of Directors from the
original $0.58 to $0.44.  This amended price was only exercisable
during the period from January 28, 2008 to February 29, 2008.  On
February 29, 2008, we issued an aggregate of 3,386,364 shares of common stock to
warrant holders in connection with their exercise of the warrants at a reduced
exercised price of $0.44.  The warrants were originally issued to
accredited investors in connection with our August 7, 2007 private
placement.  The remaining 1,213,636 outstanding warrants associated
with this original private placement expired August 8, 2008 at an exercise price
of $0.58.  Proceeds of $1,490,000 were received from the exercise of
warrants.  As part of the warrant exercises, George T. Hawes, an
affiliate, acquired 500,000 shares of the Company.





Coupled
with the private offering on June 12, 2008 investors also received warrants to
purchase 5,777,778 shares common stock at a price of $1.30 per
share.  These warrants expire five years from their date of
issuance.  A portion of these warrants to acquire 3,220,000 shares of
our commons stock were amended in connection with the June 2009 Private
Placement to reduce the exercise price from $1.30 to $0.75.





In
connection with the June 2009 Private Placement  the
Company  issued warrants to the KFLP to acquire 1,000,000 shares of
Company common stock at an exercise price of $0.10 per share.  The
warrants expired in five years and were immediately exercisable.  In
connection with the December 2009 Private Placement, the KFLP elected to
exercise its warrants to purchase 1,000,000 shares of Company Common
Stock  through the payment by the KFLP of the warrant exercise price
of $0.10 per share. Additionally, Christine L. Koski and Robert C. Koski, as
Directors of the Company, each exercised previously issued options to purchase
100,000 shares of the





Company's
Common Stock at the option exercise price of $0.10 per share. These options were
automatically granted to both Christine and Robert Koski when they became
non-employee directors of the Company on June 30, 2009.





On
September 14, 2009 the Company issued 250,000 warrants to Strategic Growth
International to purchase common stock at an exercise price of $0.30 per
share.  These shares were issued in connection with a contract to
provide investor relations services.




A summary
of the status of the Company’s outstanding and exercisable warrants as of
December 31, 2009 is presented below:




Shares
      UnderlyingWarrant Outstanding
                        
                        Exercise Price
                        
                        Expiration Date2,557,778
                        
                        $
                        1.30
                        
                        5/30/20133,220,000
                        
                        
                        0.75
                        
                        5/30/2013100,000
                        
                        
                        0.50
                        
                        4/15/2014250,000
                        
                        
                        0.30
                        
                        9/14/20126,127,778




A summary
of the status of the Company’s outstanding and exercisable warrants as of
December 31, 2008 is presented below:





Shares
      UnderlyingWarrant Outstanding
                        
                        Exercise Price
                        
                        Expiration Date5,777,778
                        
                        $
                        1.30
                        
                        5/30/2013




Stock
Compensation Plan





The
Company originally adopted the Oragenics, Inc. 2002 Stock Option and Incentive
Plan on September 17, 2002. An Amended and Restated 2002 Stock Option and
Incentive Plan was subsequently adopted by our Board and approved by our
shareholders in May 2006 (the “Plan”). The First Amendment to the Plan, which
increased the number of shares from 3,000,000 to 5,000,000 was approved by our
shareholders in April 2008.  Our stockholders approved the Second
Amendment to the Plan to increase the shares available for issuance under the
Plan from 5,000,000 to 12,500,000 shares in October 2009.  The purpose
of the Plan is to advance the interests of the Company by affording certain
employees and directors of the Company and key consultants and advisors an
opportunity to acquire or increase their proprietary
interests in the Company. The Plan authorizes the grant of stock options
(incentive and non-statutory), stock appreciation rights and restricted stock.
As of December 31, 2009 and 2008, the Company had not awarded any stock
appreciation rights or restricted stock under the Plan. The Company has reserved
an aggregate of 12,500,000 and 5,000,000 shares of common stock for grants under
the Plan at December 31, 2009 and 2008, respectively, of which 4,780,700 and
430,000 shares, respectively, are available for future grants as of
December 31, 2009 and  2008. The exercise price of each option
shall be determined by the Board and an option’s maximum term is ten
years.


F-14





Oragenics,
Inc.


Notes to
Financial Statements (continued)


December
31, 2009 and 2008




During
the years ended December 31, 2009, 2008 and 2007, the Company recognized a
stock compensation expense of $392,129, $513,611 and $161,471, respectively, in
accordance with GAAP..





During
2009, there were 2,645,000 options forfeited due to lack of exercise of
employees and directors.  On August 13, 2009, the compensation committee
approved the acceleration of the vesting of certain outstanding option
awards, the vesting of which was tied to our share price reaching certain levels
in the future.  Option awards previously made to Mr. David
Hirsch, our President and Chief Executive Officer, Dr. Jeffrey Hillman, our
Chief Science Officer and certain other Company employees were
impacted by the accelerated vesting of these options (433,333 shares for Mr.
Hirsch, 500,000 shares for Dr. Hillman, 563,333 for other Company
employees).  Following the acceleration of vesting by the compensation
committee, Mr. Hirsch's grant of options to acquire 500,000 shares of our common
stock at $0.49 per share is now fully vested and exercisable
(including the 433,333 shares impacted by the acceleration of vesting), Dr.
Hillman's grant of options to acquire 700,000 shares of our common stock
at $0.85 per share is now fully vested and exercisable (including the
500,000 shares impacted by the acceleration of vesting).  The options
previously had a performance condition that was not probable.  They
are vested without any condition and a compensation expense of $177,800 was
recognized at the modification date, no compensation expense was previously
recognized.  All other terms of the prior option awards, including
the share amounts covered by the options and exercise
prices remained the same.





On
December 30th, 2009,
we completed the initial closing of a private placement of equity pursuant to a
Common Stock Purchase Agreement with accredited investors. Contemporaneously
with the financing transaction, Christine L. Koski and Robert C. Koski, as
Directors of the Company, each exercised previously issued options to purchase
100,000 shares of the Company's Common Stock at the option
exercise price of $0.10 per share. These options were automatically granted to
both Christine and Robert Koski when they became non-employee directors of the
Company on June 30, 2009.





As of the
date of this filing there are approximately 6,127,778 warrants outstanding and
there are approximately 7,881,800 stock options have been granted that have not
been forfeited. The total number of outstanding warrants and unexercised stock
options is 14,009,578.  If all warrants and stock options were exercised,
the total number of outstanding shares would be approximately
122,212,726.




A summary
of the status of the Company’s outstanding stock options as of December 31,
2009 and 2008 and changes during the periods ending on those dates is presented
below:





WeightedOption
                                  
                                  
                                  AveragePrice Per
                                  
                                  
                                  ExerciseOptions
                                  
                                  
                                  Share
                                  
                                  
                                  PriceOutstanding
      at December 31, 2007
                                  
                                  
                                  1,345,000
                                  
                                  
                                  $
                                  0.32 - 4.25
                                  
                                  
                                  $
                                  1.25Forfeited
                                  
                                  
                                  (930,000
                                  )
                                  
                                  
                                  0.32
      - 4.25
                                  
                                  
                                  
                                  1.37Granted
                                  
                                  
                                  4,155,000
                                  
                                  
                                  
                                  0.28 - 2.00
                                  
                                  
                                  
                                  0.56Outstanding
      at December 31, 2008
                                  
                                  
                                  4,570,000
                                  
                                  
                                  $
                                  0.28 - 4.25
                                  
                                  
                                  $
                                  0.60Forfeited
                                  
                                  
                                  (2,645,000
                                  )
                                  
                                  
                                  0.28
      - 4.00
                                  
                                  
                                  
                                  0.60Granted
                                  
                                  
                                  5,994,300
                                  
                                  
                                  
                                  0.10
      - 0.30
                                  
                                  
                                  
                                  0.27Exercised
                                  
                                  
                                  (200,000
                                  )
                                  
                                  
                                  0.10 - 0.10
                                  
                                  
                                  
                                  0.10Outstanding
      at December 31, 2009
                                  
                                  
                                  7,719,300
                                  
                                  
                                  $
                                  0.27 - 0.85
                                  
                                  
                                  $
                                  0.35Exercisable
      at the end of the year
                                  
                                  
                                  5,622,118
                                  
                                  
                                  $
                                  0.28 - 0.85
                                  
                                  
                                  $
                                  0.62




F-15





Oragenics,
Inc.


Notes to
Financial Statements (continued)


December
31, 2009 and 2008





The range
of exercise price for outstanding options at December 31, 2009 is $0.27 to $0.85
per share. The weighted-average per option fair value of options granted during
2009 and 2008 was $0.27 and $0.56, respectively, and the weighted average
remaining contractual life of those options is 9.5 years.  Options
vest over a period of two to three years from respective grant dates and the
options expire 10 years after the date of grant. The fair value of these options
was estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:  weighted average
risk-free interest rate of 0.04%; dividend yields of 0%; weighted-average
volatility factors of the expected market price of the Company’s common stock of
146.0%; and an expected life of the option of ten years.  Future
compensation expense related to the outstanding options as of December 31, 2009
is $1,421,982.




9.
Licenses




The
Company has two license agreements with the University of Florida Research
Foundation, Inc. (“UFRF”) for their technologies. The Company issued 599,940
shares of common stock as partial consideration in 1998. The license agreements
provide for, among otherthings, the Company to make minimum annual research
expenditures of $1,000,000 and to adhere to specific milestones. Beginning in
2005, the Company was required to pay minimum royalties on product sales of
$50,000 annually per agreement. If the Company fails to perform certain of its
obligations, UFRF may terminate the license agreements.  The Company’s
milestones are in compliance with UFRF and the Company had $25,000 and $50,000
of royalties payable to UFRF recorded in the accompanying balance sheets in
accounts payable and accrued expenses at December 31, 2009 and 2008,
respectively.




10.
Retirement Plan




In
January 2004, the Company established a defined contribution Simple Individual
Retirement Arrangement (IRA) plan, replacing the previous plan that had been
established in 2001. The new plan covers all employees and provides for a
Company match of up to 3% of all employee contributions to the plan. Total
matching contributions made by the Company in 2009, 2008, and 2007 were $24,718,
$17,644, and $5,383, respectively.




11.
Income Taxes




At
December 31, 2009 and 2008, the Company had temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and their respective income tax bases, as measured by enacted state and federal
tax rates, as follows:




2009
                    
                    
                    2008Deferred
      tax assets:Net
      operating loss carryforward
                    
                    $
                    8,702,188
                    
                    
                    $
                    7,075,638Compensation
      to Directors & Officers and consulting
      services
                    
                    
                    14,486
                    
                    
                    
                    38,601Total
      deferred tax assets
                    
                    
                    8,716,674
                    
                    
                    
                    7,114,239Less valuation
      allowance
                    
                    
                    (8,716,674
                    )
                    
                    
                    (7,114,239
                    )Total
      net deferred taxes
                    
                    $
                    -
                    
                    
                    $
                    -




The
following is a reconciliation of tax computed at the statutory federal rate to
the income tax benefit in the statements of operations for the years ended
December 31, 2009, 2008 and 2007:




Years
      Ended December 312009
                                          
                                          
                                          2008
                                          
                                          
                                          2007Income
      tax benefit computed at statutory federal rate of
      34%
                                          
                                          $
                                          (1,876,579
                                          )
                                          
                                          $
                                          (2,047,392
                                          )
                                          
                                          $
                                          (785,982
                                          )State
      income tax benefits, net of federal
      expense/benefit
                                          
                                          
                                          (200,352
                                          )
                                          
                                          
                                          (218,589
                                          )
                                          
                                          
                                          (83,915
                                          )Change
      in valuation allowance
                                          
                                          
                                          1,602,435
                                          
                                          
                                          
                                          2,066,955
                                          
                                          
                                          
                                          814,662Non-deductible
      expenses
                                          
                                          
                                          474,496
                                          
                                          
                                          
                                          199,026
                                          
                                          
                                          
                                          61,144Other
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (5,909
                                          )Total
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -


F-16





Oragenics,
Inc.


Notes to
Financial Statements (continued)


December
31, 2009 and 2008





In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the levels of
historical taxable income and projections of future taxable income over which
the deferred tax assets are deductible, the Company believes that it is more
likely than not that it will not be able to realize the benefits of some of
these deductible differences.





Accordingly,
a valuation allowance of $8,716,674 and $7,114,239 has been provided in the
accompanying financial statements as of December 31, 2009 and 2008,
respectively. The 2009 net change in valuation allowance related to deferred tax
assets was an increase of $1,602,435 primarily relating to net operating loss
carryforwards.




At
December 31, 2009, the Company has federal and state tax net operating loss
carryforwards of approximately $23,125,665. The federal and state tax loss
carryforward will expire through 2022, unless previously utilized. The Company
also has federal research and development tax credit carryforwards of
approximately $384,276. The federal tax credit carryforward will expire through
2022, unless previously utilized.




Pursuant
to Internal Revenue Service Code Sections 382 and 383, use of the Company’s net
operating losses and credit carryforwards are limited due to a cumulative change
in ownership of more than 50% that occurred in 2009.  As a result of
the 50% change in ownership, the annual amount of pre-change net operating
losses that may be used in periods subsequent to the change in ownership is
approximately $172,000.  The impact of this limitation is factored
into management’s valuation allowance placed against the Company’s deferred tax
assets.




In July
2006, the FASB issued guidance which clarifies accounting for uncertainty in
income taxes recognized in an entity’s financial statements in accordance with
GAAP and prescribes a recognition threshold and measurement attributes for
financial statement disclosure of tax positions taken or expected to be taken on
a tax return.  Under GAAP, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that
is more-likely-than-not to be sustained upon audit by the relevant taxing
authority.  An uncertain income tax position will not be recognized if
it has less than a 50% likelihood of being sustained.  Additionally,
GAAP provides guidance on derecognition, classification, interest and penalties,
accounting for interim periods, disclosure and transition.





As of
January 1, 2007, the Company recognized a $252,827 increase in the liability for
unrecognized tax benefits that are related to research and development credits,
which was accounted for as a reduction to the January 1, 2007 balance of the
deferred tax asset valuation allowance.  The entire amount of this
unrecognized tax benefit, if recognized, would result in an increase to the
deferred tax asset valuation allowance, and would not have an impact on the
effective tax rate.





For the
years ended December 31, 2009 and 2008, the Company incurred $43,057 and
$50,890, respectively, of additional unrecognized tax benefits that resulted in
a decrease to the deferred tax asset valuation allowance, related to research
and development credits. The entire amount of this unrecognized tax benefit, if
recognized, would result in an increase to the deferred tax asset valuation
allowance, and would not have an impact on the effective tax rate.





The
Company files its income tax returns in the U.S. federal jurisdiction and in
Florida. With few exceptions, the Company is no longer subject to federal or
state income tax examinations by tax authorities for years before
2006.




F-17




Oragenics,
Inc.


Notes to
Financial Statements (continued)


December
31, 2009 and 2008




A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:




Balance
      as of December 31, 2007
                                            
                                            $
                                            290,329Additions based
      on tax positions related to the
current year
                                            
                                            
                                            50,890Additions for
      the tax positions of prior years
                                            
                                            
                                            -Reductions for
      the tax positions of prior years
                                            
                                            
                                            -Balance
      as of December 31, 2008
                                            
                                            $
                                            341,219Additions based
      on tax positions related to the
current year
                                            
                                            
                                            43,057Additions for
      the tax positions of prior years
                                            
                                            
                                            -Reductions for
      the tax positions of prior years
                                            
                                            
                                            -Balance
      as of December 31, 2009
                                            
                                            $
                                            384,276




Included
in the balance at December 31, 2009 and 2008, are $384,276 and $341,219,
respectively, of tax positions for which there is uncertainty about the validity
of certain credits. The disallowance of the credits would impact the amount of
gross deferred tax assets reflected in the accompanying footnotes.





During
the years 2009, 2008 and 2007 the Company did not recognize any interest and
penalties. Due to the potential offset of the Company’s operating loss
carryforward for any future activity, the amount attributed to interest and
penalties would be immaterial.




12.
Commitments and Contingencies




The
Company’s Alachua facility is being leased from a real estate developer for a
term of two years renewed in December 2009. Lease payments are
capped during the term with the exception of taxes and insurance exceeding 3%.
This operating lease agreement required the Company to pay a deposit of $6,400
and provides for monthly lease payments of $8,993, inclusive of utilities,
insurance, sales taxes and real estate taxes. Rent expense under this lease was
$97,187, $89,753, and $89,524 for the years ended December 31, 2009, 2008,
and 2007, respectively. On October 1, 2009 the Company leased office space for
Corporate, Sales and Marketing personnel located in Tampa, FL.  The
lease is for approximately 3,150 square feet and is occupied by seven
employees.  The lease period for the office space is forty months in
the amount of $5,276 per month inclusive of insurance, taxes and
utilities.  The lease expires on January 31, 2013.  Rent
expense under this lease was $15,828 for the year ended December 31,
2009.





The
Company terminated two lease agreements in August and October 2009 for office
spaces which were located in Alachua and St. Petersburg, Florida,
respectively.




Future
annual minimum payments under all non-cancelable operating leases are
approximately as follows as of December 31, 2009:




Year
      ended:2010
                    
                    
                    171,2292011
                    
                    
                    162,2362012
                    
                    
                    63,3172013
                    
                    
                    5,276$
                    402,058




F-18





Oragenics,
Inc.


Notes to
Financial Statements (continued)


December
31, 2009 and 2008





13.
Unaudited Quarterly Financial Information




The
quarterly interim financial information shown below has been prepared by the
Company’s management and is unaudited. It should be read in conjunction with the
audited financial statements appearing herein.





2009First
                              
                              
                              Second
                              
                              
                              Third
                              
                              
                              FourthRevenue
                              
                              $
                              124,272
                              
                              
                              $
                              41,895
                              
                              
                              $
                              199,675
                              
                              
                              $
                              275,444Total
      operating expenses
                              
                              
                              2,092,819
                              
                              
                              
                              1,605,328
                              
                              
                              
                              1,593,353
                              
                              
                              
                              1,460,091Net
      loss
                              
                              
                              (1,980,350
                              )
                              
                              
                              (869,048
                              )
                              
                              
                              (1,437,184
                              )
                              
                              
                              (1,232,766
                              )Loss per
      share:Basic and
      Diluted
                              
                              $
                              (0.06
                              )
                              
                              $
                              (0.02
                              )
                              
                              $
                              (0.02
                              )
                              
                              $
                              (0.01
                              )
  2008First
                              
                              
                              Second
                              
                              
                              Third
                              
                              
                              FourthRevenue
                              
                              $
                              125,000
                              
                              
                              $
                              -
                              
                              
                              $
                              100,000
                              
                              
                              $
                              8,539Total
      operating expenses
                              
                              
                              926,095
                              
                              
                              
                              1,111,553
                              
                              
                              
                              1,253,200
                              
                              
                              
                              2,983,596Net
      loss
                              
                              
                              (791,636
                              )
                              
                              
                              (1,095,112
                              )
                              
                              
                              (1,138,117
                              )
                              
                              
                              (2,996,877
                              )Loss per
      share:Basic and
      Diluted
                              
                              $
                              (0.03
                              )
                              
                              $
                              (0.03
                              )
                              
                              $
                              (0.03
                              )
                              
                              $
                              (0.08
                              )
  2007First
                              
                              
                              Second
                              
                              
                              Third
                              
                              
                              FourthRevenue
                              
                              $
                              33,088
                              
                              
                              $
                              26,673
                              
                              
                              $
                              46,584
                              
                              
                              $
                              26,743Total
      operating expenses
                              
                              
                              584,070
                              
                              
                              
                              627,631
                              
                              
                              
                              542,321
                              
                              
                              
                              719,205Net
      loss
                              
                              
                              (541,156
                              )
                              
                              
                              (596,392
                              )
                              
                              
                              (487,333
                              )
                              
                              
                              (686,832
                              )Loss per
      share:Basic and
      Diluted
                              
                              $
                              (0.03
                              )
                              
                              $
                              (0.03
                              )
                              
                              $
                              (0.02
                              )
                              
                              $
                              (0.03
                              )





14.
Subsequent Events




On
January 13, 2010 the Company completed the $3,004,062 private placement
contemplated by the Common Stock Purchase Agreement and December 2009 Private
Placement and issued another 2,000,000 shares of common stock at a price of
$0.25 per share to accredited investors for $500,000.  Of this amount
the KFLP again participated in one half of the remainder of the aggregate
investment by acquiring 1,000,000 of the shares for $250,000.




F-19


EXHIBIT
INDEX




Incorporated
by Reference




Exhibit
                    Number
                  
                  Exhibit Description
                  
                  Form
                  
                  File No
                  
                  Exhibit
                  
                  Filing
                    Date
                  
                  Filed
                    Herewith3.1
                  
                  Amended
      and Restated Articles of Incorporation
                  
                  SB-2
                  
                  333-100568
                  
                  3.3
                  
                  10/16/023.2
                  
                  Amendment
      to Amended and Restated Articles of Incorporation
                  
                  8-K
                  
                  001-32188
                  
                  10.2
                  
                  10/30/093.3
                  
                  Bylaws
                  
                  SB-2
                  
                  333-100568
                  
                  3.2
                  
                  10/16/024.1
                  
                  Specimen
      Stock Certificate
                  
                  SB-2
                  
                  333-100568
                  
                  4.1
                  
                  10/16/024.2
                  
                  Securities
      Purchase Agreement between George Hawes, William Matlack and Oragenics,
      Inc. dated June 12, 2008 (including form of June 2008
    Warrant)
                  
                  8-K
                  
                  001-32188
                  
                  10.1
                  
                  6/16/084.3
                  
                  Securities
      Purchase Agreement dated June 29, 2009 by and between the Company and the
      Koski Family Limited Partnership (including the Form of the Promissory
      Note and Form of the Warrant)
                  
                  8-K
                  
                  001-32188
                  
                  10.1
                  
                  7/6/094.4
                  
                  Secured
      Promissory Note issued to the Koski Family Limited
    Partnership
                  
                  8-K
                  
                  001-32188
                  
                  10.2
                  
                  7/6/094.5
                  
                  Security
      Agreement between the Company and the Koski Family Limited
      Partnership
                  
                  8-K
                  
                  001-32188
                  
                  10.3
                  
                  7/6/0910.1
                  
                  License
      Agreement between the Company and the University of Florida Research
      Foundation, Inc. effective August 4, 1998 for Replacement Therapy for
      Dental Caries (the “Replacement Therapy License
Agreement”)
                  
                  SB-2
                  
                  333-100568
                  
                  10.1
                  
                  10/16/0210.2
                  
                  First
      Amendment to Replacement Therapy License Agreement dated
      September 15, 2000
                  
                  SB-2
                  
                  333-100568
                  
                  10.2
                  
                  10/16/0210.3
                  
                  Second
      Amendment to Replacement Therapy License Agreement dated June
      2002
                  
                  SB-2
                  
                  333-100568
                  
                  10.3
                  
                  10/16/0210.4
                  
                  Third
      Amendment to Replacement Therapy License Agreement dated
      September 25, 2002
                  
                  SB-2
                  
                  333-100568
                  
                  10.4
                  
                  10/16/0210.5
                  
                  Fourth
      Amendment to Replacement Therapy License Agreement and Antimicrobial
      Polypeptide License Agreement dated March 2003
                  
                  SB-2/A-3
                  
                  333-100568
                  
                  10.36
                  
                  4/9/0310.6
                  
                  License
      Agreement between the Company and the University of Florida Research
      Foundation, Inc. effective June 22, 2000 (the “Antimicrobial
      Polypeptide License Agreement”)
                  
                  SB-2
                  
                  333-100568
                  
                  10.5
                  
                  10/16/0210.7
                  
                  First
      Amendment to the Antimicrobial Polypeptide License Agreement dated
      September 15, 2000
                  
                  SB-2
                  
                  333-100568
                  
                  10.6
                  
                  10/16/02









Exhibit
                      Number
                    
                    Exhibit Description
                    
                    Form
                    
                    File No
                    
                    Exhibit
                    
                    Filing
                      Date
                    
                    Filed
                      Herewith10.8
                    
                    Second
      Amendment to the Antimicrobial Polypeptide License Agreement dated
      June 10, 2002
                    
                    SB-2
                    
                    333-100568
                    
                    10.7
                    
                    10/16/0210.9
                    
                    Third
      Amendment to the Antimicrobial Polypeptide License Agreement dated
      September 25, 2002
                    
                    SB-2
                    
                    333-100568
                    
                    10.7
                    
                    10/16/0210.10+
                    
                    Amended
      and Restated 2002 Stock Option and Incentive Plan (including Form of Stock
      Option Agreement)
                    
                    10-QSB/A
                    
                    001-32188
                    
                    10.1
                    
                    9/29/0610.11
                    
                    First
      Amendment to Amended and Restated Stock Option Plan
                    
                    8-K
                    
                    001-32188
                    
                    4.2
                    
                    4/14/0810.12
                    
                    Second
      Amendment to Amended and Restated Stock Option Plan
                    
                    8-K
                    
                    001-32188
                    
                    10.1
                    
                    10/30/0910.13
                    
                    Proprietary
      Information and Invention Agreement between the Company and Jeffrey D.
      Hillman
                    
                    SB-2
                    
                    333-100568
                    
                    99.4
                    
                    10/16/0210.14
                    
                    Employment
      Agreement of Jeffrey D. Hillman
                    
                    10-KSB
                    
                    000-50614
                    
                    10.43
                    
                    3/17/0410.15
                    
                    Lease
      Agreement between the Company and Hawley-Wiggins LLC dated
      January 28, 2004; Subordination Agreement dated April 14, 2004;
      and First Amendment dated November 15, 2004
                    
                    10-KSB
                    
                    001-32188
                    
                    10.46
                    
                    3/14/0510.16
                    
                    Employment
      Agreement of David Hirsch dated May 14, 2008 and the Addendum of June 27,
      2008
                    
                    10-Q
                    
                    001-32188
                    
                    10.1
                    
                    08/14/0810.17
                    
                    Lease
      Agreement between the Company and Astrazenca LP  dated October
      12, 2009(3000 Bayport Drive, Suite 685, Tampa, FL 33607)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    X10.18
                    
                    Lease
      Agreement between the Company and Hawley-Wiggins LLC  dated
      October 23, 2009 (13700 Progress Blvd, Alachua, FL 32615)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    X10.19
                    
                    Common
      Stock Purchase Agreement dated December 30, 2009
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    X23.1
                    
                    Consent
      of Kirkland Russ Murphy & Tapp, PA, an independent public accounting
      firm
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    X24.
                    
                    Powers
      of Attorney (included on signature page)31.1
                    
                    Rule
      13a-14(a)/15d-14(a) Certification
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    X31.2
                    
                    Rule
      13a-14(a)/15d-14(a) Certification
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    X32.1
                    
                    Section
      1350 Certifications
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    X32.2
                    
                    Section
      1350 Certifications
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    X