Urigen Pharmaceuticals, Inc. - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
Form 10-K
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(Mark
One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended June 30, 2007
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission
File Number 0-22987
URIGEN
PHARMACEUTICALS, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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94-3156660
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(State
or other jurisdiction
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(IRS
Employer
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of
incorporation or organization)
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Identification
No.)
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875
Mahler Road, Suite 235, Burlingame, CA
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94010
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(Address
of principal offices)
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(Zip
Code)
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(650) 259-0239
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock,
Par Value $.001
Indicate
by check mark whether the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o 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 o No x
Indicate
by check mark whether the
registrant (1) has filed all reports required 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 o
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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
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Large
Accelerated
Filero
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Accelerated
Filero
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Non-accelerated
Filerx
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Indicate
by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No x
The
aggregate market value of the common stock held by non-affiliates of the
registrant, based upon the last sale price of the common stock reported on
the
OTC-Bulletin Board on December 29, 2006 was $4,755,400.
The
number of shares of registrant’s common stock outstanding, as of October
1, 2007 was 68,289,535.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
FOR
THE YEAR ENDED JUNE 30, 2007
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Page
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PART I
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Item
1
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Business
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3
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Item
1A
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Risk
Factors
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18
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Item
1B
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Unresolved
Staff
Comments
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34
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Item
2
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Properties
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34
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Item
3
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Legal
Proceedings
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34
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Item
4
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Submission
of Matters to a Vote
of Security Holders
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34
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PART II
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Item
5
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Market
for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
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34
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Item
6
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Selected
Financial
Data
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35
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Item
7
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Management’s
Discussion and
Analysis of Financial Condition and Results of Operations
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36
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Item
7A
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Quantitative
and Qualitative
Disclosures About Market Risk
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45
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Item
8
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Financial
Statements and
Supplementary Data
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46
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Item
9
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Changes
in and Disagreements With
Accountants on Accounting and Financial Disclosure
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46
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Item
9A
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Controls
and
Procedures
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46
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Item
9B
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Other
Information
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47
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PART III
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Item
10
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Directors
and Executive Officers
of the Registrant
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48
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Item
11
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Executive
Compensation
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53
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Item
12
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Security
Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
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55
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Item
13
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Certain
Relationships and Related
Transactions
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57
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Item
14
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Principal
Accountant Fees and
Services
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57
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PART IV
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Item
15
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Exhibits
and Financial Statement
Schedules
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58
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SIGNATURES
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64
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2
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ITEM
1.
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BUSINESS
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This
Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements include, without limitation,
statements containing the words “believes,” “anticipates,” “expects,” “intends,”
“projects,” “estimates” and other words of similar import or the negative of
those terms or expressions. Forward-looking statements in this section include,
but are not limited to, expectations regarding any strategic opportunities
that
may be available to us, expectations of future levels of research and
development spending, general and administrative spending, levels of capital
expenditures and operating results, our intention to license potential products
and technologies to a pharmaceutical company that may assume responsibility
for
late-stage development and commercialization and our intention to seek revenue
from the licensing of our proprietary manufacturing technologies.
Forward-looking statements subject to certain known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Factors
that could affect our actual results include the outcomes of our clinical trials
in patients with painful bladder syndrome, urethritis and acute
urgency/frequency from an overactive bladder; uncertainties related to our
financial condition, uncertainties related to the strategic opportunities that
may be available to us; our need for additional capital; our going
concern report from our independent registered public accounting firm and the
other risk factors set forth in this Annual Report on Form 10-K. Further,
there can be no assurance that necessary regulatory approvals for any of our
potential products may be obtained. We undertake no obligation to revise or
update any such forward-looking statements. The reader is strongly urged to
read
the information set forth under the caption “Part I, Item 1A. Risk Factors,
for a detailed description of these significant risks, uncertainties and other
factors.”
CORPORATE
OVERVIEW
We
were
formerly known as Valentis, Inc. and were formed as the result of the merger
of
Megabios Corp. and GeneMedicine, Inc. in March 1999. We were incorporated in
Delaware on August 12, 1997. In August 1999, we acquired U.K.-based
PolyMASC Pharmaceuticals plc.
On
October 5, 2006, we entered into an Agreement and Plan of Merger, as
subsequently amended (the “Merger”) with Urigen N.A.., Inc., a
Delaware corporation (“Urigen N.A.”), and Valentis Holdings, Inc., our
newly formed wholly-owned subsidiary (“Valentis Holdings ”). Pursuant to the
Merger Agreement, on July 13, 2007, Valentis Holdings was merged with and into
Urigen N.A., Inc. with Urigen N.A., Inc. surviving as our wholly-owned
subsidiary. In connection with the Merger, each Urigen stockholder received,
in
exchange for each share of Urigen N.A., Inc. common stock held by such
stockholder immediately prior to the closing of the Merger, 2.2554 shares of
our
common stock. At the effective time of the Merger, each share of Urigen N.A..,
Inc. Series B preferred stock was exchanged for 11.277 shares of our common
stock. An aggregate of 51,226,679 shares of our common stock were issued to
the
Urigen N.A., Inc. stockholders. Upon completion of the Merger, we
changed our name from Valentis, Inc. to Urigen Pharmaceuticals, Inc. (the
"Company").
From
and
after the Merger, our business is conducted through our wholly owned subsidiary
Urigen N.A. The discussion of our business in this annual report is that of
our
current business which is conducted through Urigen N.A.
We
are
located in Burlingame, California, where our headquarters and business
operations are located.
3
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BUSINESS
OVERVIEW
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We
specialize in the design and implementation of innovative products for patients
with urological ailments including, specifically, the development of innovative
products for amelioration of Painful Bladder Syndrome (PBS), Urethritis, and
Overactive Bladder (OAB).
Urology
represents a specialty pharmaceutical market of approximately 12,000 physicians
in North America. Urologists treat a variety of ailments of the urinary tract
including urinary tract infections, bladder cancer, overactive bladder, urgency
and incontinence and interstitial cystitis, a subset of PBS. Many of these
indications represent significant, underserved therapeutic market
opportunities.
Over
the
next several years a number of key demographic and technological factors should
accelerate growth in the market for medical therapies to treat urological
disorders, particularly in our product categories. These factors include the
following:
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Aging
population. The incidence of urological disorders increases with age.
The over-40 age group in the United States is growing almost twice
as fast
as the overall population. Accordingly, the number of individuals
developing urological disorders is expected to increase significantly
as
the population ages and as life expectancy continues to
rise.
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Increased
consumer awareness. In recent years, the publicity associated with
new technological advances and new drug therapies has increased the
number
of patients visiting their urologists to seek treatment for urological
disorders.
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Urigen
N.A. has been established as a specialty pharmaceutical company to develop
and
commercialize products for the treatment of urological disorders. We have
established an initial group of clinical stage products, as more fully described
below, that we believe offer potential solutions to underserved urology
markets.
Urigen
N.A. is a specialty pharmaceutical company dedicated to the development and
commercialization of therapeutic products for urological disorders. Our two
lead
programs target significant unmet medical needs and major market opportunities
in urology. Our URG101 project targets painful bladder syndrome which affects
approximately 10.5 million men and women in North America. URG101 has
demonstrated safety and activity in a Phase IIa (open-label) human clinical
trial and in a Phase IIb double-blind, placebo-controlled trial. URG101 is
a
unique, proprietary combination therapy of components approved by global
regulatory authorities that is locally delivered to the bladder for rapid relief
of pain and urgency. In 2007, URG101 clinical development will encompass a
pharmacodynamic study. We have also begun to develop additional indications
for URG101 focusing on radiation cystitis and dyspareunia (painful
intercourse).
To
expand
the pipeline, we have initiated discussions with pharmaceutical companies that
have either an approved product or a product in development for the treatment
of
additional urological indications. We believe that our URG100 and URG300
programs, when commercialized, will offer significant “marketing coat-tails”
that can dramatically grow the sales of niche urology products. Although such
products do not match the potential revenue streams of URG101 and URG301, the
incremental income they could generate for us is potentially significant as
such
products will enable us to maximize the time, effort and expense of the sales
organization that we plan to establish to market URG101 and URG301 to urologists
in the United States.
4
We
plan
to market our products to urologists and urogynecologists in the United States
via a specialty sales force managed internally. As appropriate, our specialty
sales force will be augmented by co-promotion and licensing agreements with
pharmaceutical companies that have the infrastructure to market our products
to
general practitioners. In all other countries, we plan to license marketing
and
distribution rights to our products to pharmaceutical companies with strategic
interests in urology and gynecology.
Following
is a description of our products currently in development, the anticipated
market for such products as well as the competitive environment in these
markets.
URG101
Presently,
no approved products exist for treating PBS, and those that have been approved
for interstitial cystitis, a subset of PBS, are based on clinical studies which
have shown the drugs to be marginally effective. According to its website,
the
FDA has approved two drugs for the treatment of interstitial cystitis and
neither is labeled as providing immediate system relief. For example, at three
months, the oral drug Elmiron achieved a therapeutic benefit in only 38% of
patients on active drug versus 20% on placebo. The other drug approved for
interstitial cystitis, RIMSO®-50 is an intravesical treatment that was not based
on double-blind clinical trial results. According to The Interstitial Cystitis
Data Base Study Experience published in the year 2000, RIMSO®-50 is widely
recognized as ineffective and not included among the top ten most common
physician-prescribed treatments for urinary symptoms.
Consequently,
there remains a significant need for new therapeutic interventions such as
URG101 that can address the underlying disease process while also providing
acute symptom relief. PBS is a chronic disease characterized by moderate to
severe pelvic pain, urgency, urinary frequency, dyspareunia (painful
intercourse) with symptoms originating from the bladder. Current epidemiology
data shows that PBS may be much more prevalent than previously
thought.
One
theory of PBS’s pathological cause implicates a dysfunction of the bladder
epithelium surface called the urothelium. The epithelium is the inner lining
of
tissue organs. Normally, the urothelium is covered with a mucus layer, the
glycosaminoglycan, or GAG, layer, which is thought to protect the bladder from
urinary toxins. A deficiency in the GAG layer would allow these toxins to
penetrate into the bladder wall activating pain sensing nerves and causing
bladder muscle spasms. These spasms trigger responses to urinate resulting
in
the symptoms of pelvic pain, urgency and frequency, the constellation of
symptoms associated with this disease. Once established, PBS can be a chronic
disease, which can persist throughout life and can have a devastating impact
on
quality of life.
We
believe that the prevalence of PBS in North America is estimated to be 10.5
million, of which 3.8 million would experience severe enough symptoms to be
classified as having interstitial cystitis, a subset of PBS. This estimate
was
based on studies conducted by Clemens and colleagues at Northwestern University
and by Matt T. Rosenberg and Matthew Hazzard at the Mid-Michigan Health
Centers. Each group independently concluded that the number of subjects with
interstitial cystitis have been significantly underestimated. They evaluated
over 1,000 female primary care patients over the course of a year using a pain,
urgency/frequency questionnaire to categorize subjects as symptomatic or not.
We
calculated the North America PBS population based on a cutoff score of 10 on
the
pain, urgency/frequency scale, and assumed a rtio of 1:2 for men to women;
and
for interstitial cystitis population we used a more stringent cutoff score
of
15.
5
We
have
licensed the URG101 technology from the University of California, San Diego.
The
license agreement is exclusive with regard to patent rights and non-exclusive
with regard to the written technical information. We may also grant a sublicense
to third parties. Pursuant to the license agreement, which was effective as
of
January 18, 2006, we were required to pay a license issue fee in the form
of 7.5% of Urigen N.A. authorized common stock, and we are required to pay
(i) license maintenance fees of $15,000 per year, (ii) milestone
payments of up to $625,000 upon the occurrence of certain events related to FDA
approval, (iii) an earned royalty fee equal to 1.5% to 3.0% of net sales,
(iv) sublicense fee, if applicable, and (v) beginning in the year of
any commercial sales, a minimum annual royalty fee of $35,000. The term of
the
license agreement ends on the earlier of the expiration date of the
longest-lived of the patent rights or the tenth anniversary of the first
commercial sale. Either party may terminate the license agreement for cause
in
the event that the other party commits a material breach and fails to cure
such
breach. In addition, we may terminate the license agreement at any time and
for
any reason upon a 90-day written notice. In the event that any licensed product
becomes the subject of a third-party claim, we have the right to conduct the
defense at our own expense, and may contest or settle claims in our sole
discretion; provided, however, that we may not agree to any settlement that
would invalidate any valid claim of the patent rights or impose any ongoing
obligation on the university. Pursuant to the terms of the license agreement,
we
must indemnify the university against any and all claims resulting or arising
out of the exercise of the license or any sublicense, including product
liability. In addition, upon the occurrence of a sale of a licensed product,
application for regulatory approval or initiation of human clinical trials,
we
must obtain and maintain comprehensive and commercial general liability
insurance.
The
individual components of this combination therapy, lidocaine and heparin, were
originally approved as a local anesthetic and an anti-coagulant, respectively.
It was demonstrated that a proprietary formulation of these components reduced
symptoms of pelvic pain and urgency upon instillation into the
bladder.
The
rationale for this combination therapy is two-fold. The lidocaine is a local
anesthetic that reduces the sensations of pain, urge and muscle spasms. The
heparin, a glycosaminoglycan, coats the bladder wall augmenting natural
heparinoids, which may be deficient on the surface of the urothelium. Heparin
is
not being utilized in this application for its anti-coagulant properties.
Heparinoids comprise part of the mucus layer of the urothelium and help to
limit
urinary toxins from penetrating the underlying tissues thereby preventing pain,
tissue inflammation and muscle spasms.
Urigen
N.A. filed an IND in 2005 to initiate a Phase IIb multi-center, randomized,
double-blind, placebo-controlled study to evaluate the safety and efficacy
of
intravesical alkalinized lidocaine-heparin for the symptoms of pelvic pain
and
urgency of bladder origin. A Phase I study was not required because the
components of URG101 are FDA-approved for other uses. The study enrolled 90
subjects randomized to drug vs. placebo in a 1:1 ratio. The study included
a
clinically relevant three-week treatment phase to evaluate the safety and
efficacy of URG101 for the treatment of pelvic pain and/or urgency of bladder
origin. While URG101 did not meet the primary endpoint in the study, we believe
the trial provided information necessary to proceed with development of the
product. There are other examples of clinical trials not achieving primary
endpoints, but the lessons learned in the study can lead to success in
Phase III, such as for Acorda Therapeutics, Inc. in their 2004 (missed
primary endpoint) and 2006 (Phase III success) press releases. The
rationale for continued development of URG101 is several-fold: the largest
and
most experienced clinical trial site met both the primary (70% drug response
versus 17% placebo) and secondary endpoints of the study. Additionally, the
study achieved a high level of statistical significance on improvement in
urgency with just one dose over placebo and trended toward improvement in pain
with just one dose. We believe that these results indicate that, in a controlled
clinical trial, subjects receiving study drug experienced meaningful symptom
improvement in both urgency and bladder pain over placebo. In the Phase II
study
patients were enrolled with bladder pain and/or urgency (both were not
required) and mild/intermittent subjects were enrolled, which can result in
the
high placebo effect observed due to “regression to the mean.” Additional drug
dosing and drug administration techniques were identified that we plan to
incorporate into future clinical trials.
6
PBS
is
currently an underserved medical market. There is no acute treatment for pain
of
bladder origin other than narcotics. Currently, there are two approved
therapeutics, RIMSO®-50 and Elmiron®, for the treatment of interstitial
cystitis. Both of these approved products require chronic administration before
any benefit is achieved. Other non-approved therapies provide marginal, if
any
benefit.
Development
of drugs for PBS/IC has targeted a wide array of potential causes with limited
success. We believe that URG101 will be well positioned, as it will address
both
the acute pain the patient experiences and the dysfunctional aspect of the
urothelium of the bladder wall.
Remaining
a virtual company, Urigen will commercialize URG101 in the United States by
collaborating with appropriate vendors to conduct a situational analysis of
the
United States; develop an appropriate product strategy; and then, create and
implement a launch plan that includes the establishment of a 75 to 100 member
sales organization that Urigen will have the option to acquire post the
successful launch of URG101.
As
appropriate, co-promotional agreements will be established with interested
parties to ensure that URG101 is adequately promoted to the entire U.S.
healthcare community. In all countries outside the United States, Urigen will
either assign licensing rights to or establish Supply and Distribution
Agreements with interested parties. Initial discussions to acquire such rights
have begun with interested parties who have a strategic interest in Urology
and
Painful Bladder Syndrome, and have the requisite infrastructure and resources
to
successfully commercialize URG101.
Manufacturing
of URG101 finished goods kits will be conducted by contract manufacturers
approved by regulatory authorities and with a history of having demonstrated
an
ability to support a global supply chain demand. Negotiations with such
manufacturers are in progress to establish requisite manufacturing and supply
agreements.
Market
Opportunity for Treatment of Radiation Cystitis
We
estimate that the incidence of radiation cystitis in the United States is more
than 34,000 cases per year. This estimate is based on a comprehensive review
of
more than 40 peer-reviewed articles on specific pelvic irradiation treatments,
such as brachytherapy and external beam radiation therapy, and the frequency
of
adverse urogenital side effects. The annual incidence was then calculated by
the
annual incidence of pelvic cancer, which can be found at
www.cancer.gov, its estimated radiation rate and adverse urinary
symptom rate. Although the symptoms of radiation cystitis are similar to those
of interstitial cystitis, the clinical etiology or underlying cause, can be
differentiated based on medical history. In fact, clinical studies of products
in development for interstitial cystitis typically exclude patients suffering
from radiation cystitis. According to a search of the FDA’s website, currently,
there are no FDA-approved or licensed treatments of these symptoms that are
caused by pelvic irradiation.
7
Pelvic
irradiation, both external beam and brachytherapy, represents one of the
cornerstones of cancer therapy for a variety of local cancers including:
prostate, ovarian, cervical, bladder, and colorectal cancers. Radiation
cystitis, or pelvic pain and/or urgency of bladder origin secondary to pelvic
irradiation, is a well-recognized side effect of pelvic
irradiation.
Based
on
extensive review of literature, we have calculated that radiation cystitis
is
observed in 6-15% of patients receiving pelvic radiotherapy, and that for
prostate cancer this rate is higher and ranges from 25-30%, or about 1 out
of
3-4 men treated. The average time from the beginning of radiation therapy to
chronic symptoms can be several months to several years. The acute symptoms
of
radiation cystitis may be so painful as to disrupt the radiation treatment
regimen. In most cases, acute symptoms are reversible several weeks after
cessation of therapy. However there is a subset of patients that develop chronic
radiation cystitis in which these symptoms remain indefinitely, possibly due
to
irreversible damage and/or improper healing of the bladder wall.
Three
subjects with radiation cystitis were treated by our scientific founder in
his
urology clinic at the University of California, San Diego Medical Center during
2005-2006 on a compassionate basis. This was not part of a clinical trial.
The
three subjects all responded with relief of their symptoms after the
installation of URG101 into their urinary bladders. We believe that these
treatments, coupled with our clinical experience with URG101 for PBS, warrant
further testing for radiation cystitis. Consequently, we have expanded
our IND to include the evaluation of URG101 in a Phase II
multi-center, randomized, double-blind, placebo-controlled crossover to
open-label study to evaluate the safety and efficacy of URG101 in patients
exhibiting symptoms of pelvic pain and /or urgency of bladder origin secondary
to pelvic irradiation. This study will be conducted in collaboration with
leading academic and oncology centers. Site initiation and commencement of
enrollment is dependent on our ability to raise additional funds through grant
or equity sources.
Competitive
Landscape
According
to a search of the FDA’s website, currently, no approved products exist for the
treatment of radiation cystitis. Relevant scientific literature reports that
therapies commonly used to treat interstitial cystitis have met limited success
when used to treat radiation cystitis. Based on clinical experience to date,
we
anticipate that URG101 could potentially offer first-line treatment to patients
suffering from pelvic pain and/or urgency due to pelvic
irradiation.
Market
Opportunity for Treatment of Dyspareunia
Dyspareunia
is sexual dysfunction manifested as painful or difficult sexual intercourse.
The
disorder is recurrent and associated with a disruption of normal functioning.
Dyspareunia occurs most frequently in females; however, incidence has also
been
reported among males.
The
actual incidence of dyspareunia is difficult to determine, since the majority
of
cases are unreported by patients. In a survey conducted by Edward O.
Laumann, Anthony Paik and Raymond C. Rosen on sexual experience and
dyspareunia, 24% of respondents stated that dyspareunia was “frequent” or
“constant,” 47% reported that they had less frequent intercourse because of
dyspareunia, and 33% reported that their dyspareunia had an adverse effect
on
their relationship with a sexual partner.
Clinical
Trial Status
An
unpublished clinical study by Dr. Joel M.H. Teichman and Dr. Blayne
Welk demonstrates that administration of URG101 relieves symptoms of dyspareunia
in women suffering from the disorder. Dr. Teichman and Dr. Welk, each of
Vancouver, Canada, studied twelve PSB/IC patients that were sexually active,
diagnosed with dyspareunia and treated with an intravesical therapeutic
solution. The patients were treated with intravesical instillations three times
per week for three weeks, and re-evaluated three weeks later. Eleven of the
twelve patients reported improvements of greater than 50%. Eight patients
reported no dyspareunia after instillations. Drs. Teichman and Welk concluded
intravesical therapeutic solution provides relief of voiding symptoms, pain,
and
dyspareunia in PSB/IC patients. Based on these anecdotal results, we are
collaborating with a leading academic center to explore the potential of URG101
to effectively treat women diagnosed with dyspareunia.
8
We
plan
to initiate a double-blind placebo-controlled study to evaluate the safety
and
efficacy of intravesical alkalinized lidocaine-heparin for dyspareunia.
Following the completion of this study, we will publish the results in a peer
reviewed urology journal.
Competitive
Landscape
There
are
no approved medications that treat dyspareunia. Personal lubricants and
medications that increase blood flow (e.g. sildenafil - Viagra® or alprostadil -
Muse®) or relax muscles have been demonstrated to be helpful in some cases. We
believe that URG101 represents a significant potential opportunity for the
treatment of female sexual dysfunction due to dyspareunia.
Market
Opportunity for Treatment of Overactive Bladder (OAB)
According
to an article published by the Mayo Foundation for Medical Education and
Research, overactive bladder is a fairly common malady as approximately 17
million individuals in the United States and more than 100 million worldwide
are
afflicted. Importantly, the condition worsens as people age.
Although
not life-threatening, for the individual overactive bladder is inconvenient,
potentially embarrassing, and may disrupt sleep; while significantly impacting
quality of life. Frequently these individuals are afraid to leave their home,
or
are unable to participate in a lengthy meeting, dinner, or social event.
Unfortunately, many of these people hesitate to seek treatment because they
think their symptoms are a normal part of aging. This mindset is incorrect
as
overactive bladder is not normal, is treatable, and treatment can significantly
ease symptoms and improve quality of life.
Patient
compliance studies report that more than half of patients taking an oral OAB
drug stop taking it within six months of initiation of therapy. Such studies
also report that only 10 to 20 percent of people remain on an oral OAB medicine
six to 12 months after initiating treatment. About a third to one-half of those
who discontinue their drug therapy do so due to side effects, they simply can
not tolerate the drug or do not find the minimal benefit they receive to
outweigh the negative effects of the drug.
Manufacturers
of these overactive bladder therapies have expended significant research energy
and money in their efforts to reduce side effects to increase patients’
adherence to treatment. However, some physicians, experts and healthcare
providers do not believe that the marginal benefits of these oral agents
outweigh the significant side effects endured by patients prescribed such
drugs.
Importantly,
given these efficacy and side effect limitations, the overactive bladder market
has experienced significant and constant double digit annual growth. According
to sales data provided by the four largest U.S. pharmaceutical companies in
their annual reports, we estimate that in the five year period 2000 through
2004
sales of OAB drugs in the United States grew from $636 million to more than
$1.3
billion, and year over year percentage increases for this five year period
were
40%, 25%, 18%, and 13%, respectively.
9
Product
Development
We
are
developing an IND to initiate an exploratory study to evaluate the safety and
efficacy of an intraurethral suppository to treat the symptoms of acute urinary
urgency associated with overactive bladder. The study will enroll subjects
randomized to drug vs. placebo in a 1:1 ratio. The study will involve a
clinically relevant treatment phase to evaluate the safety and efficacy of
URG301 and URG302 for the treatment of urgency associated with overactive
bladder.
Commercialization
Plan
We
will
commercialize URG301 and URG302 in the United States by conducting a situational
analysis of the United States; developing an appropriate product strategy;
and
then, creating and implementing a launch plan that incorporates the 75 to 100
member sales organization that we are planning to establish for the launch
of
URG101. As appropriate, co-promotional agreements will be established with
interested parties to ensure that URG301 and URG302 are adequately promoted
to
the entire U.S. healthcare community.
In
all
countries outside the United States, Urigen will either assign licensing rights
to or establish Supply and Distribution Agreements with interested parties.
Discussions to acquire such rights will be scheduled with interested
pharmaceutical companies who have a strategic interest in Incontinence and
Overactive Bladder, and have the requisite infrastructure and resources to
successfully commercialize URG301 and URG302.
Competitive
Landscape
Approved
prescription drugs used to treat overactive bladder are not optimally effective
and have side effects that can limit their use. These approved drugs—oxybutynin
(Ditropan®, Ditropan XL® and Oxytrol®, a skin patch); tolterodine (Detrol®,
Detrol LA®); trospium (Sanctura®); solifenacin (Vesicare®); and darifenacin
(Enablex®)—demonstrate remarkably similar efficacy.
Oxybutynin
has been available since 1976 and tolterodine since 1998. The short-acting
form
of oxybutynin is available as a less expensive generic drug while the
extended-release formulations of both oxybutynin and tolterodine are available,
but not as generics. An oxybutynin patch (Oxytrol) was launched in 2003 while
solifenacin and darifenacin were introduced in 2004.
Retail
prices for these products vary considerably and are tied directly to the number
of pills taken per day and whether or not the product is available generically.
The least expensive is generic oxybutynin 5mg with an average monthly cost
of
$20 compared to Ditropan 5mg at $79 and Ditropan XL 5mg costing $122 per month
on average. The average monthly cost for Detrol is $138; Detrol LA $119;
Sanctura $116; Vesicare $121; and Enablex $116. (Prices from May 2006
Wolters Kluwer Health, Pharmaceutical Audit Suite)
URG301
10
Market
Opportunity for Treatment of Acute Urethral Discomfort
(AUD)
Medical
procedures involving instrument insertion into the male or female urethra can
be
a painful experience for many patients. Nevertheless, cystoscopy and
catheterization are common medical procedures performed in a variety of medical
specialties on an outpatient basis to examine the urinary tract and the bladder
for polyps, strictures, abnormal growths and other problems.
Product
Development
We
are
considering developing a urethral suppository that contains lidocaine in a
generally recognized as safe, or GRAS, approved carrier base. Upon insertion,
the suppository would melt promptly and distribute the drug to the urethral
tissue achieving a rapid anesthetic effect.
As
all of
the components of the suppository are already approved by global regulatory
authorities, such as the FDA and the European Medicines Agency, or EMEA, our
development timelines for URG301 could be streamlined since both active drug
and
inactive components that have all been previously used in humans. However,
this
suppository will be considered a new product and will require a full review
by
the FDA and EMEA. Additionally, the single, acute use nature of these clinical
trials portends an efficient and timely development plan as clinical trial
costs
for long, multi-dose studies are significantly higher than short, single-dose
trials like the AUD clinical development program. For both AUD and urethritis
URG301 programs, we are evaluating a clinical development route that may only
require equivalent lidocaine serum levels to the approved product lidocaine
jelly. If this development program is possible, then clinical trial requirements
for these indications will be reduced.
Commercialization
Plan
URG301
will be commercialized using the sales, marketing and distribution
infrastructure established for URG101.
Competitive
Landscape
The
standard of care for Acute Urethral Discomfort ranges from no treatment,
instrument lubrication and administration of lidocaine hydrochloride jelly
(Xylocaine®) as a local anesthetic. Only lidocaine jelly is approved for surface
anesthesia and lubrication of the male and female urethra during cystoscopy,
catheterization and other endourethral operations. In males, 20 ml. of 2%
lidocaine jelly is administered to the urethra and a penile clamp is then
applied to the corona for several minutes to hold the product in the urethra.
The shorter female urethra is filled with lidocaine; however, anecdotal clinical
data suggests that the product often spills out of the urethra or into the
bladder limiting its effect. Each application requires a separate tube of
lidocaine jelly that costs approximately $20.
11
URG301
Market
Opportunity for Treatment of Urethritis
A
significant percentage of patients with PBS have a substantial urethral
component to their disease. The severity of urethral pain and discomfort may
compromise the administration of intravesical therapies. To overcome this
problem, we intend to evaluate potential development of a urethral suppository
to resolve this pain and discomfort.
Preliminary
work, by Kalium, Inc., from which we licensed the product, has been conducted
to
test a variety of GRAS approved carriers and therapeutic agents as well as
to
optimize melt times for the suppository. Additionally, patients with urethritis
were offered the use of a suppository that contained lidocaine and heparin
for
the treatment of their symptoms of urethral pain and inflammation. An optimized
formulation has been tested in an open-label clinical trial. This study was
undertaken to determine the proportion of urethral symptoms by 50% or more
in
patients with urethritis. Results were evaluated 15 minutes after administration
of the suppository using the PORIS scale. The result of this pilot Phase II
(open label) study in approximately 30 patients demonstrated a 50% or greater
improvement in 83% of patients experiencing pain and 84% of patients
experiencing urgency related to urethritis following a single treatment.
Importantly, 50% of patients had complete resolution of pain and 63% had
complete resolution of urgency. Duration of relief following a single treatment
was greater than 12 hours in approximately 30% of subjects. This testing was
not
performed as a formal clinical trial, but under physician care and information
provided to us from Kalium, Inc. Clinical development for urethritis will be
similar to AUD as lidocaine jelly is also approved for urethritis.
The
licensed patents cover a range of active ingredients that can be formulated
in
the suppository to create a desired therapeutic effect. Such agent may include
antibiotics, antimicrobials, antifungals, analgesics, anesthetics, steroidal
anti-inflammatories, non-steroidal anti-inflammatories, mucous production
inhibitors, hormones and antispasmodics.
We
have retained Navigant
Consulting, Inc. to serve as our marketing group. Initially, pursuant to
the terms of the agreement, Navigant has conducted a situational assessment
of
physicians, healthcare payers and patient advocacy groups to generate a product
strategy that addresses key geographical markets, customers, product
positioning, lifecycle management and pricing. The project cost of this first
phase was $125,000, of which $25,000 had been paid through June 30, 2007 and
$50,000 was paid in August 2007 with the balance of $50,000 being paid in
monthly installments of $5,000. Then, as appropriate, Navigant will create
and
implement a commercialization plan specific for us in the United States. The
estimated project cost of this second phase is approximately $2.6 million.
Pursuant to the terms of the agreement, Navigant will bill us monthly for all
professional services at established hourly rates, which range from $150 to
$350
per hour, plus related out-of-pocket expenses. Payment of invoices is not
contingent upon results. Navigant may terminate the agreement if payment of
fees
is not made within 60 days of the invoice date. There is no definitive
termination date of the agreement, but the estimated timing for all of the
projects ranges from 30 to 42 months. As appropriate, co-promotional
agreements will be established with interested parties to ensure that URG101
is
adequately promoted to the entire United States healthcare community.
In
January 2006, Urigen N.A. entered into an asset-based transaction
agreement with a related party, Urigen, Inc. Simultaneously, Urigen
N.A. entered into a license agreement with the University of California,
San Diego, or UCSD, for certain patent rights. In exchange for this
license, Urigen issued 818,646 common shares and is required to make annual
maintenance payments of $15,000 and milestone payments of up to $625,000, which
are based on certain events related to FDA approval. As of June 30, 2006,
$25,000 of milestone payments has been incurred. Urigen is also required to
make
royalty payments of 1.5-3.0 % of net sales of licensed products, with a minimum
annual royalty of $35,000. The term of the agreement ends on the earlier of
the
expiration of the longest-lived of the patents rights or the tenth anniversary
of the first commercial sale. Either party may terminate the license agreement
for cause in the event that the other party commits a material breach and fails
to cure such breach. In addition, Urigen may terminate the license agreement
at
any time and for any reason upon a 90-day written notice.
12
Pursuant
to our license agreement with
Kalium, Inc., made as of May 12, 2006, we and our affiliates have
an exclusive license to the patent rights and technologies, and the right
to sublicense to third parties. As partial consideration for the rights under
the license agreement and as a license fee, Urigen N.A., Inc. was required
to
issue 720,000 shares of our common stock. We are required to pay royalties
ranging from 2.0% to 4.5% of net sales, and milestone payments of up to $437,500
upon the occurrence of certain events related to FDA approval, and any
applicable sublicense payments in an amount equal to 22.5% of fees received
for
any sublicense. Pursuant to the terms of the license agreement, we must
indemnify Kalium against any and all liabilities or damages arising out of
the
development or use of the licensed products or technology, the use by third
parties of licensed products or technology, or any representations or warranty
by us. In the event that any licensed product becomes the subject of a
third-party claim, we have the right to conduct the defense at our own expense,
and may settle claims in our sole discretion; provided, however, that Kalium
must cooperate with us. The term of the license agreement ends on the earlier
of
the expiration date of the last to expire of any patent or the tenth anniversary
of the first commercial sale. The license agreement may be terminated by either
party if the other party fails to substantially perform or otherwise materially
breaches any material terms or covenants of the agreement, and such failure
or
breach is not cured within 30 days of notice thereof. In addition, Kalium
may terminate the agreement or convert the license to non-exclusive rights
if we
fail to meet certain milestones.
We
also
have a consulting agreement with Dennis Giesing, PhD, dated as of
December 11, 2006, pursuant to which Dr. Giesing agreed to perform such
services as the director of product development for one full day per calendar
week relating to the design, structuring, monitoring and conduct of certain
clinical trials. The term of the agreement is one year, with automatic renewal
on each anniversary unless either party gives notice of its intention not to
renew. For the term of the consulting agreement, Dr. Giesing is entitled to
receive a fee of $4,000 per month and received an initial issuance of
19,200 shares of Urigen N.A. Series B preferred stock, which shares
vest in twelve equal monthly installments from the date of issuance, and are
subject to repurchase by us upon the termination of the consulting
relationship.
In
countries outside of the United States, we anticipate we will either assign
licensing rights to or establish supply and distribution agreements with
interested parties. Initial discussions to acquire such rights have begun with
interested parties who have a strategic interest in urology and CPP and have
the
requisite infrastructure and resources to successfully commercialize
URG101.
Like
many
companies our size, we do not have the ability to conduct preclinical or
clinical studies for our product candidates without the assistance of third
parties who conduct the studies on our behalf. These third parties are usually
toxicology facilities and clinical research organization, or CROs that have
significant resources and experience in the conduct of pre-clinical and clinical
studies. The toxicology facilities conduct the pre-clinical safety studies
as
well as all associated tasks connected with these studies. The CROs typically
perform patient recruitment, project management, data management, statistical
analysis, and other reporting functions.
Third
parties that we use, and have used in the past, to conduct clinical trials
include Clinimetrics Research Canada, Inc. and Cardinal Health PTS, LLC. We
have
a Master Clinical Services Agreement with Clinimetrics Research, made as of
October 4, 2005, which provides that from time to time we may engage
Clinimetrics Research for research and clinical services. All services provided
by Clinimetrics Research are pursuant to a work order on a per project basis,
which work order sets out the description of the services, the fee and payments
schedule for the services, a description of the deliverables to be provided
by
Clinimetrics Research, the materials to be provided by each party and a timeline
for the project. There is no limit to the number of work orders that may be
submitted pursuant to the agreement. Unless otherwise provided in the work
order, invoices are submitted by Clinimetrics Research to us on a monthly basis,
and payments must be made within 30 days of receipt of an invoice. The term
of
the agreement is three years, unless sooner terminated. A work order or the
agreement may be terminated by us at any time upon prior written notice, by
either party upon a material breach by the other party, which breach remains
uncured for 30 days, by either party in the event of bankruptcy or insolvency
of
the party, and by us if the parties are unable to agree on a substitute project
manager.
13
We
intend
to continue to rely on third parties to conduct clinical trials of its product
candidates and to use different toxicology facilities and CROs for all of our
pre-clinical and clinical studies.
We
have
multiple intellectual property filings around our products. In general, we
plan
to file for broad patent protection in all markets where we intend to
commercialize our products. Typically, we will file our patents first in the
United States or Canada and expand the applications internationally under the
Patent Cooperation Treaty, or PCT.
Currently,
we own or have licensed two (2) issued patents and three (3) patent
applications. Based on these filings, we anticipate that our lead product
URG101, may be protected until at least 2025 and our URG300 urethral suppository
platform will be protected until at least 2018 and potentially beyond
2025.
Summary
of our Patents and Patent Applications:
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|
·
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We
have licensed U.S. Patent Application 60/540186 entitled “Novel
Interstitial Therapy for Immediate Symptom Relief and Chronic Therapy
in
Interstitial Cystitis” from the University of California, San Diego. The
application claim treatment formulations and methods for reducing
the
symptoms of urinary frequency, urgency and/or pelvic pain, including
interstitial cystitis. We have received a favorable international
search
report from the United States Patent and Trademark Office and are
optimistic that patents covering the claims for our products will
be
issued in due course.
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·
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We
have filed PCT Application PCT/US2006/019745 entitled “Kits and Improved
Compositions for Treating Lower Urinary Tract Disorders: Formulations
for
Treating Lower Urinary Tract Symptoms: which is directed to superior
buffered formulations and kits for treating lower urinary tract symptoms
and disorders.
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|
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·
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We
have licensed U.S. Patent Application Serial No. 11/475809,
entitled “Transluminal Drug Delivery Methods and Devices” from
Kalium, Inc. The application is directed to a urethral suppository
that includes a carrier base, an anesthetic, a buffering agent, and,
optionally a polysaccharide.
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·
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We
have licensed U.S. Patent No. 6,464,670 entitled “Method of
Delivering Therapeutic Agents to the Urethra and an Urethral Suppository”
from Kalium, Inc. The patent describes a meltable suppository having
a “baseball bat” shape for the administration of therapeutic agents to the
urethra. This shape is suited for the female
urethra.
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·
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We
have licensed U.S. Patent No. 7,267,670 entitled “Reinforced
Urethral Suppository” from Kalium, Inc. This application covers the
mechanical structure of a reinforced suppository that can be used
to
deliver a range of therapeutic agents to the
urethra.
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14
Our
failure to obtain patent protection or otherwise protect our proprietary
technology or proposed products may have a material adverse effect on our
competitive position and business prospects. The patent application process
takes several years and entails considerable expense. There is no assurance
that
additional patents will issue from these applications or, if patents do issue,
that the claims allowed will be sufficient to protect our
technology.
The
patent positions of pharmaceutical
and biotechnology firms are often uncertain and involve complex legal and
factual questions. Furthermore, the breadth of claims allowed in biotechnology
patents is unpredictable. We cannot be certain that others have not filed patent
applications for technology covered by our pending applications or that we
were
the first to invent the technology that is the subject of such patent
applications. Competitors may have filed applications for, or may have received
patents and may obtain additional patents and proprietary rights relating to
compounds, products or processes that block or compete with ours. We are aware
of patent applications filed and patents issued to third parties relating to
urological drugs, urological delivery technologies and urological therapeutics,
and there can be no assurance that any patent applications or patents will
not
have a material adverse effect on potential products we or our corporate
partners are developing or may seek to develop in the future.
The
production and marketing of any of our potential products will be subject to
extensive regulation for safety, efficacy and quality by numerous governmental
authorities in the United States and other countries. In the United States,
pharmaceutical products are subject to rigorous regulation by the United States
Food and Drug Administration, or FDA. We believe that the FDA and comparable
foreign regulatory bodies will regulate the commercial uses of our potential
products as drugs. Drugs are regulated under certain provisions of the Public
Health Service Act and the Federal Food, Drug, and Cosmetic Act. These laws
and
the related regulations govern, among other things, the testing, manufacturing,
safety, efficacy, labeling, storage, record keeping, and the promotion,
marketing and distribution of drug products. At the FDA, the Center for Drug
Evaluation and Research is responsible for the regulation of drug
products.
15
The
necessary steps to take before a new drug may be marketed in the United States
include the following: (i) laboratory tests and animal studies;
(ii) the submission to the FDA of an IND application for clinical testing,
which must become effective before clinical trials commence; (iii) under
certain circumstances, approval by a special advisory committee convened to
review clinical trial protocols involving drug therapeutics; (iv) adequate
and well-controlled clinical trials to establish the safety and efficacy of
the
product; (v) the submission to the FDA of a new drug application or NDA;
and (vi) FDA approval of the new drug application prior to any commercial
sale or shipment of the drug.
Facilities
used for the manufacture of drugs are subject to periodic inspection by the
FDA
and other authorities, where applicable, and must comply with the FDA’s Good
Manufacturing Practice, or GMP, regulations. Manufacturers of drugs also must
comply with the FDA’s general drug product standards and may also be subject to
state regulation. Failure to comply with GMP or other applicable regulatory
requirements may result in withdrawal of marketing approval, criminal
prosecution, civil penalties, recall or seizure of products, warning letters,
total or partial suspension of production, suspension of clinical trials, FDA
refusal to review pending marketing approval applications or supplements to
approved applications, or injunctions, as well as other legal or regulatory
action against us or our corporate partners.
Clinical
trials are conducted in three sequential phases, but the phases may overlap.
In
Phase I (the initial introduction of the product into human subjects or
patients), the drug is tested to assess safety, metabolism, pharmacokinetics
and
pharmacological actions associated with increasing doses. Phase II usually
involves studies in a limited patient population to (i) determine the
efficacy of the potential product for specific, targeted indications,
(ii) determine dosage tolerance and optimal dosage, and (iii) further
identify possible adverse effects and safety risks. If a compound is found
to be
effective and to have an acceptable safety profile in Phase II evaluations,
Phase III trials are undertaken to further evaluate clinical efficacy and
test for safety within a broader patient population at geographically dispersed
clinical sites. There can be no assurance that Phase I, Phase II or
Phase III testing will be completed successfully within any specific time
period, if at all, with respect to any of our or our corporate partners’
potential products subject to such testing. In addition, after marketing
approval is granted, the FDA may require post-marketing clinical studies that
typically entail extensive patient monitoring and may result in restricted
marketing of the product for an extended period of time.
The
results of product development, preclinical animal studies, and human studies
are submitted to the FDA as part of the NDA. The NDA must also contain extensive
manufacturing information, and each manufacturing facility must be inspected
and
approved by the FDA before the NDA will be approved. Similar regulatory approval
requirements exist for the marketing of drug products outside the
United States (e.g., Europe and Japan). The testing and approval process is
likely to require substantial time, effort and financial and human resources,
and there can be no assurance that any approval will be granted on a timely
basis, if at all, or that any potential product developed by us and/or our
corporate partners will prove safe and effective in clinical trials or will
meet
all the applicable regulatory requirements necessary to receive marketing
approval from the FDA or the comparable regulatory body of other countries.
Data
obtained from preclinical studies and clinical trials are subject to
interpretations that could delay, limit or prevent regulatory approval. The
FDA
may deny the NDA if applicable regulatory criteria are not satisfied, require
additional testing or information, or require post-marketing testing and
surveillance to monitor the safety or efficacy of a product. Moreover, if
regulatory approval of a biological product candidate is granted, such approval
may entail limitations on the indicated uses for which it may be marketed.
Finally, product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
Among the conditions for NDA approval is the requirement that the prospective
manufacturer’s quality control and manufacturing procedures conform to the
appropriate GMP regulations, which must be followed at all times. In complying
with standards set forth in these regulations, manufacturers must continue
to
expend time, financial resources and effort in the area of production and
quality control to ensure full compliance.
16
For
clinical investigation and marketing outside the United States, we and our
corporate partners may be subject to FDA as well as regulatory requirements
of
other countries. The FDA regulates the export of drug products, whether for
clinical investigation or commercial sale. In Europe, the approval process
for
the commencement of clinical trials varies from country to country. The
regulatory approval process in other countries includes requirements similar
to
those associated with FDA approval set forth above. Approval by the FDA does
not
ensure approval by the regulatory authorities of other countries.
Competition
in the pharmaceutical industry is intense and is characterized by extensive
research efforts and rapid technological progress. Several pharmaceutical
companies are also actively engaged in the development of therapies for the
treatment of PBS and overactive bladder. Such competitors may develop
safer, more effective or less costly urological therapeutics. Moreover, we
face
competition from such companies, in establishing corporate collaborations with
pharmaceutical and biotechnology companies, relationships with academic and
research institutions and in negotiating licenses to proprietary technology,
including intellectual property.
The
manufacture and sale of human therapeutic products involve an inherent risk
of
product liability claims and associated adverse publicity. We currently have
only limited product liability insurance, and there can be no assurance that
we
will be able to maintain existing or obtain additional product liability
insurance on acceptable terms or with adequate coverage against potential
liabilities. Such insurance is expensive, difficult to obtain and may not be
available in the future on acceptable terms, or at all. An inability to obtain
sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims could inhibit our business. A product
liability claim brought against us in excess of our insurance coverage, if
any,
could have a material adverse effect upon our business, financial condition
and
results of operations.
17
EMPLOYEES
As
of
June 30, 2007, we had three full-time employees, including one who holds a
doctoral degree. These employees are engaged in finance and
administrative activities.
We
currently employ five individuals full-time, including two who hold doctoral
degrees. Current employees are engaged in product development, marketing,
finance and administrative activities, including assessing strategic
opportunities that may be available to us. Our employees are not represented
by
a collective bargaining agreement. We believe our relationships with our
employees are good.
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ITEM
1A.
|
RISK
FACTORS
|
The
following risk factors outline certain risks and uncertainties concerning future
results and should be read in conjunction with the information contained in
this
Annual Report on Form 10-K. Any of these risk factors could materially and
adversely affect our business, operating results and financial condition.
Additional risks and uncertainties not presently known to us, or those we
currently deem immaterial, may also materially harm our business, operating
results and financial condition.
We
have
received a report from Burr, Pilger & Mayer LLP, our independent registered
public accounting firm, regarding our consolidated financial statements for
the
fiscal year ended June 30, 2007, which included an explanatory
paragraph stating that the financial statements were prepared assuming we will
continue as a going concern. The report also stated that our recurring operating
losses and need for additional financing have raised substantial doubt about
our
ability to continue as a going concern.
In
connection with the audit of our June 30, 2007 financial statements our
independent registered public accounting firm identified material weaknesses
in
our internal controls over financial reporting.
We
have
been informed that during the course of our audit that our independent
registered public accounting firm concluded that our internal controls over
financial reporting suffer from certain “material weaknesses” as defined in
standards established by the Public Company Accounting Oversight Board and
the
American Institute of Certified Public Accountants. We intend to commence
a
process of developing, adopting and implementing policies and procedures
to
address such material weaknesses that are consistent with those of small,
public
companies. However, that process may be time consuming and costly and there
is
no assurance as to when we will effectively address such material
weaknesses.
We
have a history of losses and may never be profitable.
We
have
engaged in research and development activities since our inception. We incurred
losses from operations of approximately $6.1 million, $15.6 million and
$11.3 million, for our fiscal years ended June 30, 2007, 2006 and
2005, respectively. As of June 30, 2007, we had an accumulated deficit
totaling approximately $243.7 million. Our products are in the development
stage and, accordingly, our business operations are subject to all of the risks
inherent in the establishment and maintenance of a developing business
enterprise, such as those related to competition and viable operations
management. We have not generated revenues from the
commercialization of any products. Our net operating losses over the near-term
and the next several years are expected to continue as a result of the further
clinical trial activity and preparation for regulatory submission necessary
to
support regulatory approval of our products. Costs associated with Phase III
clinical trials are generally substantially greater than Phase II clinical
trials, as the number of clinical sites and patients required is much
larger.
18
There
can
be no assurance that we will be able to generate sufficient product revenue
to
become profitable at all or on a sustained basis. We expect to have
quarter-to-quarter fluctuations in expenses, some of which could be significant,
due to expanded research, development, and clinical trial
activities.
Our
potential products and technologies are in early stages of
development.
The
development of new pharmaceutical products is a highly risky undertaking, and
there can be no assurance that any future research and development efforts
we
might undertake will be successful. All of our potential products will require
extensive additional research and development prior to any commercial
introduction. There can be no assurance that any future research and development
and clinical trial efforts will result in viable products.
We
do not
yet have the required clinical data and results to successfully market our
forerunner product, URG101, or any other potential product in any jurisdiction,
and future clinical or preclinical results may be negative or insufficient
to
allow us to successfully market any of our product candidates. Obtaining needed
data and results may take longer than planned or may not be obtained at
all.
Our
primary product candidate did not meet its primary endpoint in a Phase II
clinical study; therefore we are dependent upon incorporating appropriate
protocol changes to the product candidate in order to achieve positive results
in subsequent trials.
URG101
is
our patent-protected product, targeting PBS. We have recently completed a
multi-center, randomized, double-blind and placebo-controlled Phase IIb
study in 90 patients. On October 30, 2006, Urigen N.A. announced that
URG101 did not meet the primary endpoint in a Phase II clinical trial in PBS.
We
announced that the primary endpoint in this study was improvement in pain and
urgency at the end of the study as monitored by the Patient Overall Rating
of
Improvement of Symptoms questionnaire, a measurement tool used in clinical
trials of chronic pelvic pain. In this study, the difference between the URG101
treatment group and the placebo group did not achieve statistical significance
for the primary endpoint of the study.
We
believe the overall results of the clinical trial may have been compromised
by
issues relating to patient selection. Furthermore, we believe that incorporation
of appropriate protocol changes may allow us to achieve positive results in
subsequent trials. Other exploratory endpoints were either statistically
significant or trended in that direction, such as improvement in urgency with
one treatment and a trend toward improvement in bladder pain with one treatment.
In addition, we have identified important and significant changes to the study
treatment protocol, such as requiring minimum pain and urgency scores upon
entry
that will be incorporated and tested in a single dose, placebo-controlled
cross-over pharmacodynamic study. This pharmacodynamic study is planned to
be
completed as the next clinical step in the development of URG101; however,
there
can be no assurance that we will be able to achieve the primary endpoint in
this
study or that URG101 will otherwise be successfully developed into a commercial
product.
We
are subject to substantial government regulation, which could materially
adversely affect our business.
The
production and marketing of our potential products and our ongoing research
and
development, pre-clinical testing and clinical trial activities are currently
subject to extensive regulation and review by numerous governmental authorities
in the United States and will face similar regulation and review for overseas
approval and sales from governmental authorities outside of the United States.
All of the products we are currently developing must undergo rigorous
pre-clinical and clinical testing and an extensive regulatory approval process
before they can be marketed. This process makes it longer, harder and more
costly to bring our potential products to market, and we cannot guarantee that
any of our potential products will be approved. The pre-marketing approval
process can be particularly expensive, uncertain and lengthy, and a number
of
products for which FDA approval has been sought by other companies have never
been approved for marketing. In addition to testing and approval procedures,
extensive regulations also govern marketing, manufacturing, distribution,
labeling, and record-keeping procedures. If we or our business partners do
not
comply with applicable regulatory requirements, such violations could result
in
non-approval, suspensions of regulatory approvals, civil penalties and criminal
fines, product seizures and recalls, operating restrictions, injunctions, and
criminal prosecution.
19
Withdrawal
or rejection of FDA or other government entity approval of our potential
products may also adversely affect our business. Such rejection may be
encountered due to, among other reasons, lack of efficacy during clinical
trials, unforeseen safety issues, inability to follow patients after treatment
in clinical trials, inconsistencies between early clinical trial results and
results obtained in later clinical trials, varying interpretations of data
generated by clinical trials, or changes in regulatory policy during the period
of product development in the United States and abroad. In the United States,
there is stringent FDA oversight in product clearance and enforcement
activities, causing medical product development to experience longer approval
cycles, greater risk and uncertainty, and higher expenses. Internationally,
there is a risk that we may not be successful in meeting the quality standards
or other certification requirements. 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, or may prevent us from broadening the uses of our
current potential products for different applications. In addition, we may
not
receive FDA approval to export our potential products in the future, and
countries to which potential products are to be exported may not approve them
for import.
From
time
to time, legislative or regulatory proposals are introduced that could alter
the
review and approval process relating to medical products. It is possible that
the FDA or other governmental authorities will issue additional regulations
which would further reduce or restrict the sales of our potential products.
Any
change in legislation or regulations that govern the review and approval process
relating to our potential and future products could make it more difficult
and
costly to obtain approval for these products.
We
rely on third parties to assist us in conducting clinical trials. If these
third
parties do not successfully carry out their contractual duties or meet expected
deadlines, we may not be able to obtain regulatory approval for or commercialize
our product candidates.
Like
many
companies our size, we do not have the ability to conduct preclinical or
clinical studies for our product candidates without the assistance of third
parties who conduct the studies on our behalf. These third parties are usually
toxicology facilities and clinical research organization, or CROs that have
significant resources and experience in the conduct of pre-clinical and clinical
studies. The toxicology facilities conduct the pre-clinical safety studies
as
well as all associated tasks connected with these studies. The CROs typically
perform patient recruitment, project management, data management, statistical
analysis, and other reporting functions.
Third
parties that we use, and have used in the past, to conduct clinical trials
include Clinimetrics Research Canada, Inc. and Cardinal Health PTS, LLC. We
intend to continue to rely on third parties to conduct clinical trials of our
product candidates and to use different toxicology facilities and CROs for
all
of our pre-clinical and clinical studies.
20
Our
reliance on these third parties for development activities reduces our control
over these activities. If these third parties do not successfully carry out
their contractual duties or obligations or meet expected deadlines, or if the
quality or accuracy of the clinical data they obtain is compromised due to
the
failure to adhere to our clinical protocols or for other reasons, our clinical
trials may be extended, delayed or terminated. If these third parties do not
successfully carry out their contractual duties or meet expected deadlines,
we
may be required to replace them. Although we believe there are a number of
third-party contractors we could engage to continue these activities, replacing
a third-party contractor may result in a delay of the affected trial.
Accordingly, we may not be able to obtain regulatory approval for or
successfully commercialize our product candidates.
Delays
in the commencement or completion of clinical testing of our product candidates
could result in increased costs to us and delay our ability to generate
significant revenues.
Delays
in
the commencement or completion of clinical testing could significantly impact
our product development costs. We do not know whether current or planned
clinical trials will begin on time or be completed on schedule, if at all.
The
commencement of clinical trials can be delayed for a variety of reasons,
including delays in:
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obtaining
regulatory approval to commence a clinical
trial;
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reaching
agreement on acceptable terms with prospective contract research
organizations and clinical trial
sites;
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obtaining
sufficient quantities of clinical trial materials for any or all
product
candidates;
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·
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obtaining
institutional review board approval to conduct a clinical trial at
a
prospective site; and
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recruiting
participants for a clinical trial.
|
In
addition, once a clinical trial has begun, it may be suspended or terminated
by
us or the FDA or other regulatory authorities due to a number of factors,
including:
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failure
to conduct the clinical trial in accordance with regulatory
requirements;
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inspection
of the clinical trial operations or clinical trial site by the FDA
or
other regulatory authorities resulting in the imposition of a clinical
hold; or
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lack
of adequate funding to continue the clinical
trial.
|
Clinical
trials require sufficient participant enrollment, which is a function of many
factors, including the size of the target population, the nature of the trial
protocol, the proximity of participants to clinical trial sites, the
availability of effective treatments for the relevant disease, the eligibility
criteria for our clinical trials and competing trials. Delays in enrollment
can
result in increased costs and longer development times. Our failure to enroll
participants in our clinical trials could delay the completion of the clinical
trials beyond current expectations. In addition, the FDA could require us to
conduct clinical trials with a larger number of participants than it may project
for any of our product candidates. As a result of these factors, we may not
be
able to enroll a sufficient number of participants in a timely or cost-effective
manner.
21
Furthermore,
enrolled participants may drop out of clinical trials, which could impair the
validity or statistical significance of the clinical trials. A number of factors
can influence the discontinuation rate, including, but not limited to: the
inclusion of a placebo in a trial; possible lack of effect of the product
candidate being tested at one or more of the dose levels being tested; adverse
side effects experienced, whether or not related to the product candidate;
and
the availability of numerous alternative treatment options that may induce
participants to discontinue from the trial.
The
Company, the FDA or other applicable regulatory authorities may suspend clinical
trials of a product candidate at any time if we or they believe the participants
in such clinical trials, or in independent third-party clinical trials for
drugs
based on similar technologies, are being exposed to unacceptable health risks
or
for other reasons.
We
do not have commercial-scale manufacturing capability, and we lack
commercial manufacturing experience.
If
we are
successful in achieving regulatory approval and developing the markets for
our
potential products, we would have to arrange for its scaled-up manufacture
of
our products. At the present time, we have not arranged for the large-scale
manufacture of our products. There can be no assurance that we will, on a timely
basis, be able to make the transition from manufacturing clinical trial
quantities to commercial production quantities successfully or be able to
arrange for contract manufacturing. We believe one or more contractors will
be
able to manufacture our products for initial commercialization if the products
obtain FDA and other regulatory approvals. Potential difficulties in
manufacturing our products, including scale-up, recalls or safety alerts, could
have a material adverse effect on our business, financial condition, and results
of operations.
Our
products can only be manufactured in a facility that has undergone a
satisfactory inspection by the FDA and other relevant regulatory authorities.
For these reasons, we may not be able to replace manufacturing capacity for
our
products quickly if we or our contract manufacturer(s) are unable to use
manufacturing facilities as a result of a fire, natural disaster (including
an
earthquake), equipment failure, or other difficulty, or if such facilities
were
deemed not in compliance with the regulatory requirements and such
non-compliance could not be rapidly rectified. An inability or reduced capacity
to manufacture our products would have a material adverse effect on our
business, financial condition, and results of operations.
We
expect
to enter into definitive and perhaps additional arrangements with contract
manufacturing companies in order to secure the production of our products or
to
attempt to improve manufacturing costs and efficiencies. If we are unable to
enter into definitive agreements for manufacturing services and encounters
delays or difficulties in finalizing or otherwise establishing relationships
with manufacturers to produce, package, and distribute our products, then market
introduction and subsequent sales of such products would be adversely
affected.
Government
and insurance reimbursements for healthcare expenditures play an important
role
for all healthcare providers, including physicians and pharmaceutical companies
such as ours, which plan to offer various products in the United States and
other countries in the future. Our ability to earn sufficient returns on our
potential products will depend in part on the extent to which reimbursement
for
the costs of such products will be available from government health
administration authorities, private health coverage insurers, managed care
organizations, and other organizations. In the United States, our ability to
have our products eligible for Medicare, Medicaid or private insurance
reimbursement will be an important factor in determining the ultimate success
of
our products. If, for any reason, Medicare, Medicaid or the insurance companies
decline to provide reimbursement for our products, our ability to commercialize
our products would be adversely affected. There can be no assurance that our
potential drug products will be eligible for reimbursement.
22
There
has
been a trend toward declining government and private insurance expenditures
for
many healthcare items. Third-party payors are increasingly challenging the
price
of medical and pharmaceutical products.
If
purchasers or users of our products and related treatments are not able to
obtain appropriate reimbursement for the cost of using such products, they
may
forgo or reduce such use. Even if our products are approved for reimbursement
by
Medicare, Medicaid and private insurers, of which there can be no assurance,
the
amount of reimbursement may be reduced at times, or even eliminated. This would
have a material adverse effect on our business, financial condition and results
of operations.
Significant
uncertainty exists as to the reimbursement status of newly approved
pharmaceutical products, and there can be no assurance that adequate third-party
coverage will be available.
We
have limited sales, marketing and distribution experience.
We
have
very limited experience in the sales, marketing, and distribution of
pharmaceutical products. There can be no assurance that we will be able to
establish sales, marketing, and distribution capabilities or make arrangements
with our current collaborators or others to perform such activities or that
such
effort will be successful. If we decide to market any of our products directly,
we must either acquire or internally develop a marketing and sales force with
technical expertise and with supporting distribution capabilities. The
acquisition or development of a sales, marketing and distribution infrastructure
would require substantial resources, which may not be available to us or, even
if available, divert the attention of our management and key personnel, and
have
a negative impact on further product development efforts.
We
intend to seek additional collaborative arrangements to develop and
commercialize our products. These collaborations, if secured, may not be
successful.
We
intend
to seek additional collaborative arrangements to develop and commercialize
some
of our potential products, including URG101 in North America and Europe. There
can be no assurance that we will be able to negotiate collaborative arrangements
on favorable terms or at all or that our current or future collaborative
arrangements will be successful.
Our
strategy for the future research, development, and commercialization of our
products is based on entering into various arrangements with corporate
collaborators, licensors, licensees, health care institutions and principal
investigators and others, and our commercial success is dependent upon these
outside parties performing their respective contractual obligations responsibly
and with integrity. The amount and timing of resources such third parties will
devote to these activities may not be within our control. There can be no
assurance that such parties will perform their obligations as expected. There
can be no assurance that our collaborators will devote adequate resources to
our
products.
Even
if
our products are approved for sale, they may not be successful in the
marketplace. Market acceptance of any of our products will depend on a number
of
factors, including demonstration of clinical effectiveness and safety; the
potential advantages of our products over alternative treatments; the
availability of acceptable pricing and adequate third-party reimbursement;
and
the effectiveness of marketing and distribution methods for the products. If
our
products do not gain market acceptance among physicians, patients, and others
in
the medical community, our ability to generate significant revenues from our
products would be limited.
23
If
we are not successful in acquiring or licensing additional product candidates
on
acceptable terms, if at all, our business may be adversely
affected.
As
part
of our strategy, we may acquire or license additional product candidates for
treatment of urinary tract disorders. We may not be able to identify promising
urinary tract product candidates. Even if we are successful in identifying
promising product candidates, we may not be able to reach an agreement for
the
acquisition or license of the product candidates with their owners on acceptable
terms or at all.
We
intend
to in-license, acquire, develop and market additional products and product
candidates so that we are not solely reliant on URG101, URG301 and URG302 sales
for our revenues. Because we have limited internal research capabilities, we
are
dependent upon pharmaceutical and biotechnology companies and other researchers
to sell or license products or technologies to us. The success of this strategy
depends upon our ability to identify, select and acquire the right
pharmaceutical product candidates, products and technologies.
We
may
not be able to successfully identify any other commercial products or product
candidates to in-license, acquire or internally develop. Moreover, negotiating
and implementing an economically viable in-licensing arrangement or acquisition
is a lengthy and complex process. Other companies, including those with
substantially greater resources, may compete with us for the in-licensing or
acquisition of product candidates and approved products. We may not be able
to
acquire or in-license the rights to additional product candidates and approved
products on terms that we find acceptable, or at all. If we are unable to
in-license or acquire additional commercial products or product candidates,
we
may be reliant solely on URG101, URG301 and URG302 sales for revenue. As a
result, our ability to grow our business or increase our profits could be
severely limited.
If
our efforts to develop new product candidates do not succeed, and product
candidates that we recommend for clinical development do not actually begin
clinical trials, our business will suffer.
We
intend
to use our proprietary licenses and expertise in urethral tract disorders to
develop and commercialize new products for the treatment and prevention of
urological disorders. Once recommended for development, a candidate undergoes
drug substance scale up, preclinical testing, including toxicology tests, and
formulation development. If this work is successful, an IND, would need to
be
prepared, filed, and approved by the FDA and the product candidate would then
be
ready for human clinical testing.
The
process of developing new drugs and/or therapeutic products is inherently
complex, time-consuming, expensive and uncertain. We must make long-term
investments and commit significant resources before knowing whether our
development programs will result in products that will receive regulatory
approval and achieve market acceptance. Product candidates that may appear
to be
promising at early stages of development may not reach the market for a number
of reasons. In addition, product candidates may be found ineffective or may
cause harmful side effects during clinical trials, may take longer to progress
through clinical trials than had been anticipated, may not be able to achieve
the pre-defined clinical endpoint due to statistical anomalies even though
clinical benefit was achieved, may fail to receive necessary regulatory
approvals, may prove impracticable to manufacture in commercial quantities
at
reasonable cost and with acceptable quality, or may fail to achieve market
acceptance. To date, our development efforts have been focused on URG101 for
PBS. While we have experience in developing urethral suppositories, our
development efforts for URG301 and URG302 have just begun. There can be no
assurance that we will be successful with the limited knowledge and resources
we
have available at the present time.
24
As
part
of the regulatory approval process, we must conduct preclinical studies and
clinical trails for each product candidate to demonstrate safety and efficacy.
The number of preclinical studies and clinical trials that will be required
varies depending on the product candidate, the indication being evaluated,
the
trial results and regulations applicable to any particular product
candidate.
The
results of preclinical studies and initial clinical trials of our product
candidates do not necessarily predict the results of later-stage clinical
trails. Product candidates in later stages of clinical trials may fail to show
the desired safety and efficacy despite having progressed through initial
clinical trails. We cannot assure you that the data collected from the
preclinical studies and clinical trails of our product candidates will be
sufficient to support FDA or other regulatory approval. In addition, the
continuation of a particular study after review by an institutional review
board
or independent data safety monitoring board does not necessarily indicate that
our product candidate will achieve the clinical endpoint.
The
FDA
and other regulatory agencies can delay, limit or deny approval for many
reasons, including:
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·
|
changes
to the regulatory approval process for product candidates in those
jurisdictions, including the United States, in which we may be seeking
approval for our product
candidates;
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·
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a
product candidate may not be deemed to be safe or
effective;
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·
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the
ability of the regulatory agency to provide timely responses as a
result
of its resource constraints;
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·
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the
manufacturing processes or facilities may not meet the applicable
requirements; and
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·
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changes
in their approval policies or adoption of new regulations may require
additional clinical trials or other
data.
|
Any
delay
in, or failure to receive, approval for any of our product candidates or the
failure to maintain regulatory approval could prevent us from growing our
revenues or achieving profitability.
Our
potential international business would expose us to a number of
risks.
We
anticipate that a substantial amount of future sales of our potential products
will be derived from international markets. Accordingly, any failure to achieve
substantial foreign sales could have a material adverse effect on our overall
sales and profitability. Depreciation or devaluation of the local currencies
of
countries where we sell our products may result in these products becoming
more
expensive in local currency terms, thus reducing demand, which could have an
adverse effect on our operating results. Our ability to engage in non-United
States operations and the financial results associated with any such operations
also may be significantly affected by other factors, including:
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foreign
government regulatory authorities;
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product
liability, intellectual property and other
claims;
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export
license requirements;
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25
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political
or economic instability in our target
markets;
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trade
restrictions;
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changes
in tax laws and tariffs;
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managing
foreign distributors and
manufacturers;
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managing
foreign branch offices and staffing;
and
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competition.
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If
these
risks actually materialize, our anticipated sales to international customers
may
decrease or not be realized at all.
Competition
in our target markets is intense, and developments by other companies could
render our product candidates obsolete.
The
pharmaceutical industry is not a static environment, and market share can change
rapidly if competing products are introduced. While we believe we are in the
process of developing products unique in the delivery and application for
treatment of urological maladies, we face competition from
Ortho-McNeil, Inc., BioNiche, Inc., Plethora Solutions Ltd., and SJ
Pharmaceuticals, Inc., among others, who have either already developed or
are in the process of developing products similar to ours. Further, there can
be
no assurance that we can avoid intense competition from other medical technology
companies, pharmaceutical or biotechnology companies, universities, government
agencies, or research organizations that might decide to develop products
similar to ours. Many of these existing and potential competitors have
substantially greater financial and/or other resources. Our competitors may
succeed in developing technologies and products that are more effective or
cheaper to use than any that we may develop. These developments could render
our
products obsolete and uncompetitive, which would have a material adverse effect
on our business, financial condition and results of operations.
If
we suffer negative publicity concerning the safety of our products in
development, our sales may be harmed and we may be forced to withdraw such
products.
If
concerns should arise about the safety of our products once developed and
marketed, regardless of whether or not such concerns have a basis in generally
accepted science or peer-reviewed scientific research, such concerns could
adversely affect the market for these products. Similarly, negative publicity
could result in an increased number of product liability claims, whether or
not
these claims are supported by applicable law.
Adverse
events in the field of drug therapies may negatively impact regulatory
approval or public perception of our potential products and
technologies.
The
FDA
may become more restrictive regarding the conduct of clinical trials
including urological and other therapies. This approach by the FDA could lead
to
delays in the timelines for regulatory review, as well as potential delays
in
the conduct of clinical trials. In addition, negative publicity may affect
patients’ willingness to participate in clinical trials. If fewer patients are
willing to participate in clinical trials, the timelines for recruiting patients
and conducting such trials will be delayed.
26
If
our intellectual property rights do not adequately protect our products, others
could compete against us more directly, which would 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 or licenses. Patent
protection generally involves complex legal and factual questions and,
therefore, enforceability of patent rights cannot be predicted with certainty;
thus, any patents that we own or licenses from others may not provide us with
adequate protection against competitors. Moreover, the laws of certain foreign
countries do not recognize intellectual property rights or protect them to
the
same extent as do the laws of the United States.
If
third parties claim we are infringing their intellectual property rights, we
could suffer significant litigation or licensing expenses or be prevented from
marketing our products.
Any
future commercial success by the Company depends significantly on our ability
to
operate without infringing on the patents and other proprietary rights of
others. However, regardless of the Company’s intent, our potential products may
infringe upon the patents or violate other proprietary rights of third parties.
In the event of such infringement or violation, we may face expensive litigation
and may be prevented from pursuing product development or commercialization
of
our potential products or selling our products.
Litigation
may harm our business or otherwise distract our
management.
Substantial,
complex or extended litigation could cause us to incur large expenditures and
distract our management, and could result in significant monetary or equitable
judgments against us. For example, lawsuits by employees, patients, customers,
licensors, licensees, suppliers, distributors, stockholders, or competitors
could be very costly and substantially disrupt our business. Disputes from
time
to time with such companies or individuals are not uncommon, and we cannot
assure that we will always be able to resolve such disputes out of court or
on
terms favorable to us.
In
previous years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Competitors in the
biotechnology industry may use intellectual property litigation against us
to gain advantage. In the future, we may be a party to litigation to
protect our intellectual property or as a result of an alleged infringement
of
others’ intellectual property. These claims and any resulting lawsuit, if
successful, could subject us to significant liability for damages and
invalidation of our proprietary rights. Any potential intellectual property
litigation, if successful, also could force us to stop selling, incorporating
or
using our potential products that use the challenged intellectual property;
obtain from the owner of the infringed intellectual property right a license
to
sell or use the relevant technology, which license may not be available on
reasonable terms, or at all; or redesign our potential products that use the
technology. We may also be required in the future to initiate claims or
litigation against third parties for infringement of our intellectual property
rights to protect such rights or determine the scope or validity of our
intellectual property or the rights of our competitors. The pursuit of these
claims could result in significant expenditures and the diversion of our
technical and management personnel and we may not have sufficient cash and
manpower resources to pursue any such claims. If we are forced to take any
of
these actions, our business may be seriously harmed.
27
Any
claims, with or without merit, and regardless of whether we prevail in the
dispute, would be time-consuming, could result in costly litigation and the
diversion of technical and management personnel and could require us to develop
non-infringing technology or to enter into royalty or licensing agreements.
An
adverse determination in a judicial or administrative proceeding and failure
to
obtain necessary licenses or develop alternate technologies could prevent us
from developing and selling our potential products, which would have a material
adverse effect on our business, results of operations and financial
condition.
If
we fail to attract and keep key management and scientific personnel, we may
be
unable to develop or commercialize our product candidates
successfully.
Our
success depends on our continued ability to attract, retain and motivate highly
qualified management and scientific personnel. The loss of the services of
any
principal member of our senior management, including William J. Garner,
Chief Executive Officer, Martin E. Shmagin, Chief Financial Officer, and
Terry M. Nida, Chief Operating Officer, could delay or prevent the
commercialization of our product candidates. We employ these individuals on
an
at-will basis and their employment can be terminated by us or them at any time,
for any reason and with or without notice, subject to the terms contained in
their employment offer letters.
Competition
for qualified personnel in the biotechnology field is intense. We may not be
able to attract and retain quality personnel on acceptable terms given the
competition for such personnel among biotechnology, pharmaceutical and other
companies.
We
have
established a scientific advisory board consisting of C. Lowell Parsons, M.D.
who is Chairman and Professor of the Department of Urology at the University
of
California, San Diego and S. Grant Mulholland, M.D. who is Chair Emeritus of
Urology at Jefferson Medical College of Thomas Jefferson
University. These members assist us in formulating research and
development strategies. These scientific advisors are not our employees and
may
have commitments to, or consulting or advisory contracts with, other entities
that may limit their availability to us. The failure of our scientific advisors
to devote sufficient time and resources to our programs could harm our business.
In addition, our scientific advisors may have arrangements with other companies
to assist those companies in developing products or technologies that may
compete with our products.
If
our primary product candidate, URG101, or any of our other product candidates,
cannot be shown to be safe and effective in clinical trials, are not approvable
or not commercially successful, then the benefits of the Merger may not be
realized. Our Phase IIb clinical trial of URG101 did not meet its primary
endpoint. We cannot guarantee that URG101, or any other of our product
candidates, will be successful in any future clinical trials and any future
clinical trial of URG101, or any other of our product candidate, would require
substantial additional capital, which may not be available on commercially
reasonable terms, or at all.
Following
the Merger, our primary product candidate is URG101. URG101 and our other
product candidates are subject to all of the risks attendant to any drug and
biologic product candidate. For instance, any of our product candidates must
be
rigorously tested in clinical trials, and shown to be safe and effective before
the FDA, or its foreign counterparts, will consider them for approval. Failure
to demonstrate that our product candidates, especially URG101, are safe and
effective, or significant delays in demonstrating safety and efficacy, would
diminish the anticipated benefits of the Merger. Moreover, once approved for
sale, if ever, any product must be successfully commercialized. Failure to
successfully commercialize one or more of our current product candidates would
also diminish the anticipated benefits of the Merger.
28
As
stated
above, on October 30, 2006, Urigen N.A. announced that URG101 did not meet
the primary endpoint in a Phase II clinical trial in chronic pelvic pain of
bladder origin. Urigen N.A. announced that the primary endpoint in this study
was improvement in pain and urgency at the end of the study as monitored by
the
Patient Overall Rating of Improvement of Symptoms questionnaire, a measurement
tool used in clinical trials of chronic pelvic pain. We believe the overall
results of the clinical trial may have been compromised by issues relating
to
patient selection. Furthermore, we believe that incorporation of appropriate
protocol changes may allow it to achieve positive results in subsequent
trials.
If
URG101, or any of our other product candidates, cannot be shown to be safe
and
effective in clinical trials, are not approvable or not commercially successful,
then the benefits of the Merger may not be realized, which would materially
adversely affect our business.
We may
not achieve projected development goals in the time frame we announce and
expect.
We
may
set goals for and make public statements regarding timing of the accomplishment
of objectives material to its success, such as the commencement and completion
of clinical trials, anticipated regulatory approval dates, and time of product
launch. The actual timing of these events can vary dramatically due to factors
such as delays or failures in its clinical trials, the uncertainties inherent
in
the regulatory approval process, and delays in achieving product development,
manufacturing or marketing milestones necessary to commercialize the combined
company’s products. There can be no assurance that our clinical trials will be
completed, that we will make regulatory submissions or receive regulatory
approvals as planned, or that the combined company will be able to adhere to
its
current schedule for the scale-up of manufacturing and launch of any of its
products. If we fail to achieve one or more of these milestones as planned,
the
price of our common shares could decline.
We
face potential Canadian tax liability related to Urigen N.A.’s continuation from
British Columbia to the State of Delaware.
In
addition, to the extent the fair market value of the assets exceeds Urigen
N.A.’s debts and the paid up capital of Urigen N.A.’s common stock immediately
before the continuance, Urigen N.A. will be subject to an additional tax at
the
same rate as if a dividend had been paid by Urigen N.A.
We
will need to obtain additional financing in order to continue our operations,
which financing might not be available or which, if it is available, may be
on terms that are not favorable to us.
Our
ability to engage in future development and clinical testing of our potential
products will require substantial additional financial resources. We currently
use approximately $200,000 per month to operate our business and we believe
we
have sufficient cash to continue our operations until February 2008. Our future
funding requirements will depend on many factors, including:
|
|
·
|
Our
financial condition;
|
|
|
·
|
timing
and outcome of the Phase II clinical trials for
URG101;
|
|
|
·
|
developments
related to our collaboration agreements, license agreements, academic
licenses and other material
agreements;
|
29
|
|
·
|
our
ability to establish and maintain corporate
collaborations;
|
|
|
·
|
the
time and costs involved in filing, prosecuting and enforcing patent
claims; and
|
|
|
·
|
competing
pharmacological and market
developments.
|
We
may have insufficient working capital to fund our cash needs unless we are
able to raise additional capital in the future. We have financed our operations
to date primarily through the sale of equity securities and through corporate
collaborations. If we raise additional funds by issuing equity securities,
substantial dilution to our stockholders may result. We may not be
able to obtain additional financing on acceptable terms, or at all. Any failure
to obtain an adequate and timely amount of additional capital on commercially
reasonable terms will have a material adverse effect on our business and
financial condition, including our viability as an enterprise. As a result
of
these concerns, our management is assessing, and may pursue, in addition to
the Merger, other strategic opportunities, including the sale of our securities
or other actions.
If
we are unable to complete our assessment as to the adequacy of our internal
control over financial reporting within the required time periods as required
by
Section 404 of the Sarbanes-Oxley Act of 2002, or in the course of such
assessments identify and report material weaknesses in our controls, investors
could lose confidence in the reliability of our financial statements, which
could result in a decrease in the value of our common
stock.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities
and Exchange Commission adopted rules requiring public companies to include
a report of management on internal control over financial reporting in their
Annual Reports on Form 10-K. This report is required to contain an
assessment by management of the effectiveness of a company’s internal control
over financial reporting. In addition, the independent registered public
accounting firm auditing a public company’s financial statements must attest to
and report on management’s assessment of the effectiveness of the company’s
internal control over financial reporting. Our current non-affiliated market
capitalization qualifies us as a non-accelerated filer. As such, we are required
to comply with the Section 404 requirements beginning with the fiscal year
that ends June 30, 2008. We intend to diligently and vigorously assess
(and enhance as may be appropriate) our internal control over financial
reporting in order to ensure compliance with the Section 404 requirements.
We anticipate expending significant resources in developing the necessary
documentation and testing procedures required by Section 404, however,
there is a risk that we will not comply with all of the requirements imposed
by
Section 404. In addition, the very limited size of our organization could
lead to conditions that could be considered material weaknesses, such as those
related to segregation of duties, that is possible in larger organizations
but
significantly more difficult in smaller organizations. Also, controls related
to
our general information technology infrastructure may not be as
comprehensive as in the case of a larger organization with more sophisticated
capabilities and more extensive resources. It is not clear how such
circumstances should be interpreted in the context of an assessment of internal
control over financial reporting. If we fail to implement required new or
improved controls, we may be unable to comply with the requirements of
Section 404 in a timely manner, which may result in our independent
registered public accounting firm issuing a qualified or adverse report on
our
internal control over financial reporting. This could result in an adverse
reaction in the financial markets due to a loss of confidence in the reliability
of our financial statements, which could cause the market price of our common
stock to decline.
We
may continue to incur losses for the foreseeable future, and might never achieve
profitability.
We
may
never become profitable, even if we are able to commercialize additional
products. We will need to conduct significant research, development, testing
and
regulatory compliance activities that, together with projected general and
administrative expenses, is expected to result in substantial increase in
operating losses for at least the next several years. Even if we achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
30
The
market price of our common stock is subject to significant fluctuations. Market
prices for securities of early-stage pharmaceutical, biotechnology and other
life sciences companies have historically been particularly volatile. Some
of
the factors that may cause the market price of our common stock to fluctuate
include:
|
|
·
|
the
results of our current and any future clinical trials of its product
candidates;
|
|
|
·
|
the
results of ongoing preclinical studies and planned clinical trials
of our
preclinical product candidates;
|
|
|
·
|
the
entry into, or termination of, key agreements, including, among others,
key collaboration and license
agreements;
|
|
|
·
|
the
results and timing of regulatory reviews relating to the approval
of our
product candidates;
|
|
|
·
|
the
initiation of, material developments or conclusion of litigation to
enforce or defend any of our intellectual property
rights;
|
|
|
·
|
failure
of any of our product candidates, if approved, to achieve commercial
success;
|
|
|
·
|
general
and industry-specific economic conditions that may affect our research
and
development expenditures;
|
|
|
·
|
the
results of clinical trials conducted by others on drugs that would
compete
with our product candidates;
|
|
|
·
|
issues
in manufacturing our product candidates or any approved
products;
|
|
|
·
|
the
loss of key employees;
|
|
|
·
|
the
introduction of technological innovations or new commercial products
by
our competitors;
|
|
|
·
|
changes
in estimates or recommendations by securities analysts, if any, who
cover
our common stock;
|
|
|
·
|
future
sales of our common stock; and
|
|
|
·
|
period-to-period
fluctuations in our financial
results.
|
Moreover,
the stock markets in general have experienced substantial volatility that has
often been unrelated to the operating performance of individual companies.
These
broad market fluctuations may also adversely affect the trading price of our
common stock.
31
In
the
past, following periods of volatility in the market price of a company’s
securities, stockholders have often instituted class action securities
litigation against those companies. Such litigation, if instituted, could result
in substantial costs and diversion of management attention and resources, which
could significantly harm our financial position, results of operations and
reputation.
Our
common stock is quoted on the OTC Bulletin Board. As a result, our common stock
is subject to trading restrictions as a “penny stock,” which could adversely
affect the liquidity and price of such stock.
Our
common stock has been quoted on the OTC Bulletin Board since June 19, 2007.
Because our common stock is not listed on any national securities exchange,
our
shares are subject to the regulations regarding trading in “penny stocks,” which
are those securities trading for less than $5.00 per share. The following is
a
list of the general restrictions on the sale of penny stocks:
|
|
·
|
Prior
to the sale of penny stock by a broker-dealer to a new purchaser,
the
broker-dealer must determine whether the purchaser is suitable to
invest
in penny stocks. To make that determination, a broker-dealer must
obtain,
from a prospective investor, information regarding the purchaser's
financial condition and investment experience and objectives.
Subsequently, the broker-dealer must deliver to the purchaser a written
statement setting forth the basis of the suitability finding and
obtain
the purchaser’s signature on such
statement.
|
|
|
·
|
A
broker-dealer must obtain from the purchaser an agreement to purchase
the
securities. This agreement must be obtained for every purchase until
the
purchaser becomes an “established customer.” A broker-dealer may not
effect a purchase of a penny stock less than two business days after
a
broker-dealer sends such agreement to the
purchaser.
|
|
|
·
|
The
Exchange Act requires that prior to effecting any transaction in
any penny
stock, a broker-dealer must provide the purchaser with a “risk disclosure
document” that contains, among other things, a description of the penny
stock market and how it functions and the risks associated with such
investment. These disclosure rules are applicable to both purchases
and
sales by investors.
|
|
|
·
|
A
dealer that sells penny stock must send to the purchaser, within
ten days
after the end of each calendar month, a written account statement
including prescribed information relating to the
security.
|
These
requirements can severely limit the liquidity of securities in the secondary
market because few brokers or dealers are likely to be willing to undertake
these compliance activities. Because our common stock is subject to the rules
and restrictions regarding penny stock transactions, an investor’s ability to
sell to a third party and our ability to raise additional capital may be
limited. We make no guarantee that our market-makers will make a market in
our
common stock, or that any market for our common stock will
continue.
Our
stock price could be adversely affected by dispositions of our shares pursuant
to registration statements currently in effect.
Some
of
our current stockholders hold a substantial number of shares, which they are
currently able to sell in the public market under certain registration
statements currently in effect, or otherwise. Sales of a substantial number
of
our shares or the perception that these sales may occur, could cause the
trading price of our common stock to fall and could impair our ability to raise
capital through the sale of additional equity securities.
As
of
June 30, 2007, we had issued and outstanding 17,062,856 shares of our
common stock. This amount does not include, as of
June 30, 2007:
|
|
·
approximately 2.6 million shares of our common stock issuable upon
the exercise of all of our outstanding options and the release of
restricted stock awards; and
|
|
|
·
approximately 4.7 million shares of our common stock issuable upon
the exercise of all of our outstanding
warrants.
|
32
These
shares of common stock, if and when issued, may be sold in the public
market assuming the applicable registration statements continue to remain
effective and subject in any case to trading restrictions to which our insiders
holding such shares may be subject from time to time. If these options or
warrants are exercised and sold, our stockholders may experience additional
dilution and the market price of our common stock could fall.
In
addition, in connection with the Merger, stockholders of Urigen N.A. may sell
a
significant number of shares of our common stock they received in the Merger.
Such holders have had no ready market for their Urigen N.A. shares and might
be
eager to sell some or all of their shares. Further, Urigen N.A. recently entered
into agreements with a couple of its vendors and business partners which give
Urigen N.A.. the right to pay certain amounts due to such vendors and business
partners for goods and services with shares of its Series B preferred stock
in lieu of cash. Such vendors and business partners may be more inclined to
sell
our common stock than other investors as they have not been long-term investors
of Urigen N.A.. Significant sales could adversely affect the market price for
our common stock for a period of time.
Our
amended and restated certificate of incorporation and by-laws, include
anti-takeover provisions that may enable our management to resist an
unwelcome takeover attempt by a third party.
Our
basic
corporate documents and Delaware law contain provisions that enable our
management to attempt to resist a takeover unless it is deemed by our management
and board of directors to be in the best interests of our stockholders. Those
provisions might discourage, delay or prevent a change in control of our company
or a change in our management. Our board of directors may also choose to
adopt further anti-takeover measures without stockholder approval. The existence
and adoption of these provisions could adversely affect the voting power of
holders of our common stock and limit the price that investors might be willing
to pay in the future for shares of our common stock.
Urigen
N.A. has entered into agreements with a vendor and business partners that
give us the right to pay certain amounts due for goods and services with shares
of its Series B preferred stock and common stock. Under the agreement with
one of our business partners, we were required to make a one-time issuance
of 19,200 shares of Series B preferred stock, under the agreement with
the other business partner, Urigen may pay milestone fees of up to $437,500
in
shares of its common stock in lieu of cash, and under the vendor agreement,
we are required to issue $10,000 worth of our common stock per
month until the agreement is terminated by either party. There is no definitive
termination date of the vendor agreement. The shares issued under the agreement
with the first business partner vest in twelve equal monthly installments from
the date of issuance, and are subject to repurchase by us upon the termination
of the consulting relationship.
We
may not be able to meet the initial listing standards to trade on a national
securities exchange such as the Nasdaq Capital Market or the American Stock
Exchange, which could adversely affect the liquidity and price of the combined
company’s common stock.
We
intend
to raise additional capital and consummate a reverse stock split in order to
meet the requirements to obtain the listing of our common stock on a national
securities exchange such as the Nasdaq Capital Market or the American Stock
Exchange. The initial listing qualification standards for new issuers are
stringent and, although we may explore various actions to meet the minimum
initial listing requirements for a listing on a national securities exchange,
there is no guarantee that any such actions will be successful in bringing
us
into compliance with such requirements.
33
If
we
fail to achieve listing of our common stock on a national securities exchange,
our common shares may continue to be traded on the OTC Bulletin Board or other
over-the-counter markets in the United States, although there can be no
assurance that our common shares will be eligible for trading on any such
alternative markets or exchanges in the United States.
In
the
event that we are not able to obtain a listing on a national securities exchange
or maintain our reporting on the OTC Bulletin Board or other quotation service
for our common shares, it may be extremely difficult or impossible for
stockholders to sell their common shares in the United States. Moreover,
if our common stock remains quoted on the OTC Bulletin Board or other
over-the-counter market, the liquidity will likely be less, and therefore the
price will be more volatile, than if our common stock was listed on a national
securities exchange. Stockholders may not be able to sell their common shares
in
the quantities, at the times, or at the prices that could potentially be
available on a more liquid trading market. As a result of these factors, if
our
common shares fail to achieve listing on a national securities exchange, the
price of our common shares is likely to decline. In addition, a decline in
the
price of our common shares could impair our ability to achieve a national
securities exchange listing or to obtain financing in the future.
|
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
|
ITEM
2.
|
PROPERTIES
|
We
pay a
fee of $2,683 per month, which is based on estimated fair market value, to
EGB Advisors, LLC for rent and other office services at our headquarters in
Burlingame, California. EGB Advisors, LLC is owned solely by William J. Garner,
president and chief executive officer of Urigen Pharmaceuticals,
Inc.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Market
Information
34
|
High
|
Low
|
|||||||
|
2005
|
||||||||
|
First
Quarter
|
$ |
3.90
|
$ |
2.20
|
||||
|
Second
Quarter
|
3.19
|
2.26
|
||||||
|
Third
Quarter
|
2.90
|
2.11
|
||||||
|
Fourth
Quarter
|
2.60
|
1.48
|
||||||
|
2006
|
||||||||
|
First
Quarter
|
$ |
3.95
|
$ |
2.12
|
||||
|
Second
Quarter
|
4.06
|
2.64
|
||||||
|
Third
Quarter
|
3.50
|
0.15
|
||||||
|
Fourth
Quarter
|
1.07
|
0.29
|
||||||
|
2007
|
||||||||
|
First
Quarter
|
$ |
0.47
|
$ |
0.22
|
||||
|
Second
Quarter
|
0.32
|
0.10
|
||||||
|
Third
Quarter
|
0.16
|
0.16
|
||||||
|
Fourth
Quarter (October 2, 2007)
|
0.15
|
0.15
|
||||||
On
October 2, 2007 the last sale price reported on the OTC Bulletin Board for
our common stock was $0.15 per share. As of that date, there were 532
stockholders of record of our common stock.
Sales
and Repurchases of Securities
During
the period covered by this Annual Report on Form 10-K, we sold and issued
the following securities, which were not registered under the Securities Act
of
1933:
There
were no registered or unregistered shares issued during the fiscal year.
Further, we repurchased 24,881 shares of common stock from an employee upon
releasing of vested restricted stock for an aggregate price of $11,459 during
the fiscal year ended June 30, 2007.
Dividends
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
The
data
set forth below should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the Consolidated
Financial Statements and related Notes included elsewhere in this report.
35
|
Year Ended June 30,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(in thousands, except per share data)
|
||||||||||||||||||||
|
Consolidated
Statement of Operations Data:
|
||||||||||||||||||||
|
License
and milestone revenue
|
$ |
571
|
$ |
627
|
$ |
1,640
|
$ |
7,284
|
$ |
3,958
|
||||||||||
|
Contract
research revenue
|
―
|
100
|
476
|
—
|
—
|
|||||||||||||||
|
Other
revenue
|
—
|
—
|
61
|
194
|
—
|
|||||||||||||||
|
Total
revenue
|
571
|
727
|
2,177
|
7,478
|
3,958
|
|||||||||||||||
|
Costs
and Operating expenses:
|
||||||||||||||||||||
|
Cost
of contract research revenue
|
―
|
93
|
521
|
—
|
—
|
|||||||||||||||
|
Research
and development
|
872
|
10,847
|
8,823
|
9,465
|
9,421
|
|||||||||||||||
|
General
and administrative
|
4,783
|
5,368
|
4,109
|
4,501
|
9,403
|
|||||||||||||||
|
Restructuring
charges
|
1,029
|
—
|
—
|
—
|
832
|
|||||||||||||||
|
Total
operating expenses
|
6,684
|
16,308
|
13,453
|
13,966
|
19,656
|
|||||||||||||||
|
Loss
from operations
|
(6,113 | ) | (15,581 | ) | (11,276 | ) | (6,488 | ) | (15,698 | ) | ||||||||||
|
Interest,
other income and expense, net
|
2,380
|
244
|
193
|
4
|
838
|
|||||||||||||||
|
Net
loss
|
(3,733 | ) | (15,337 | ) | (11,083 | ) | (6,484 | ) | (14,860 | ) | ||||||||||
|
Deemed
dividend
|
—
|
—
|
—
|
—
|
(4,972 | ) | ||||||||||||||
|
Adjustment
resulting from the reduction in the Series A Preferred stock
conversion price
|
—
|
—
|
—
|
—
|
(22,293 | ) | ||||||||||||||
|
Dividends
on convertible preferred stock
|
—
|
—
|
—
|
—
|
(882 | ) | ||||||||||||||
|
Net
loss applicable to common stockholders
|
$ | (3,733 | ) | $ | (15,337 | ) | $ | (11,083 | ) | $ | (6,484 | ) | $ | (43,007 | ) | |||||
|
Basic
and diluted net loss per share applicable to common
stockholders
|
$ | (0.22 | ) | $ | (0.99 | ) | $ | (0.85 | ) | $ | (0.81 | ) | $ | (13.86 | ) | |||||
|
Shares
used in computing basic and diluted net loss per common
share
|
17,052
|
15,453
|
13,028
|
8,024
|
3,103
|
|||||||||||||||
|
June 30,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||
|
Consolidated
Balance Sheet Data:
|
||||||||||||||||||||
|
Cash,
cash equivalents and short-term investments
|
$ |
478
|
$ |
4,348
|
$ |
12,513
|
$ |
20,450
|
$ |
3,290
|
||||||||||
|
Working
capital
|
21
|
2,300
|
10,624
|
16,905
|
230
|
|||||||||||||||
|
Total
assets
|
1,109
|
5,258
|
14,152
|
21,891
|
6,078
|
|||||||||||||||
|
Accumulated
deficit
|
(243,707 | ) | (239,974 | ) | (224,637 | ) | (213,554 | ) | (207,070 | ) | ||||||||||
|
Total
stockholders’ equity
|
435
|
2,843
|
11,569
|
17,890
|
2,589
|
|||||||||||||||
As
noted
under Reclassifications in Note 1 to the Consolidated Financial Statements,
the
Company has reclassified patent costs to general and administrative expense,
which had previously been classified in research and development expense.
The
amounts reclassified were $381,000, $346,000, $569,000, and $544,000 in the
years ended June 30, 2006, 2005, 2004, and 2003, respectively.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
|
The
discussion in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements include, without limitation, statements containing the words
“believes,” “anticipates,” “expects,” “intends,” “projects,” “estimates,” and
other words of similar import or the negative of those terms or expressions.
Forward-looking statements in this section include, but are not limited to,
expectations regarding any strategic opportunities that may be available to
us,
expectations of future levels of research and development spending, general
and
administrative spending, levels of capital expenditures and operating results,
our intention to license potential products and technologies to a pharmaceutical
company that will assume responsibility for late-stage development and
commercialization and our intention to seek revenue from the licensing of our
proprietary manufacturing technologies. Forward-looking statements subject
to
certain known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Factors that could affect our actual results include
the outcomes of our clinical trials in patients with peripheral arterial
disease, uncertainties related to our financial condition, uncertainties related
to the strategic opportunities that may be available to us, our need for
additional capital, our going concern report from our independent registered
public accounting firm and the other risk factors set forth in this Annual
Report on Form 10-K. Further, there can be no assurance that necessary
regulatory approvals for any of our potential products will be obtained. Actual
results may differ materially from those projected in such forward-looking
statements as a result of the “Risk Factors” described previously and other
risks detailed in our reports filed with the Securities and Exchange Commission.
We undertake no obligation to revise or update any such forward-looking
statements.
36
CORPORATE
OVERVIEW
We
were
formerly known as Valentis, Inc. and were formed as the result of the merger
of
Megabios Corp. and GeneMedicine, Inc. in March 1999. We were incorporated in
Delaware on August 12, 1997. In August 1999, we acquired U.K.-based
PolyMASC Pharmaceuticals plc.
On
October 5, 2006, we entered into an Agreement and Plan of Merger, as
subsequently amended (the “Merger ”) with Urigen N.A.., Inc., a Delaware
corporation (“Urigen N.A.”), and Valentis Holdings, Inc., our
newly formed wholly-owned subsidiary (“Valentis Holdings ”). Pursuant to the
Merger Agreement, on July 13, 2007, Valentis Holdings was merged with and into
Urigen N.A., with Urigen N.A. surviving as our wholly-owned subsidiary. In
connection with the Merger, each Urigen stockholder received, in exchange for
each share of Urigen N.A. common stock held by such stockholder immediately
prior to the closing of the Merger, 2.2554 shares of our common stock. At the
effective time of the Merger, each share of Urigen N.A. Series B preferred
stock was exchanged for 11.277 shares of our common stock. An aggregate of
51,226,679 shares of our common stock were issued to the Urigen N.A.
stockholders. Upon completion of the Merger, we changed our name from Valentis,
Inc. to Urigen Pharmaceuticals, Inc.
From
and
after the Merger, our business is conducted through our wholly owned subsidiary
Urigen N.A. The discussion of our business in this annual report is that or
our
current business which is conducted through Urigen
N.A The historical financial results discussed herein are those
of Valentis, Inc. through June 30, 2007.
BUSINESS
OVERVIEW
We
specialize in the design and implementation of innovative products for patients
with urological ailments including, specifically, the development of innovative
products for amelioration of Painful Bladder Syndrome (PBS), Urethritis, and
Overactive Bladder (OAB).
Urology
represents a specialty pharmaceutical market of approximately 12,000 physicians
in North America. Urologists treat a variety of ailments of the urinary tract
including urinary tract infections, bladder cancer, overactive bladder, urgency
and incontinence and interstitial cystitis, a subset of PBS. Many of these
indications represent significant, underserved therapeutic market
opportunities.
Over
the
next several years a number of key demographic and technological factors should
accelerate growth in the market for medical therapies to treat urological
disorders, particularly in our product categories. These factors include the
following:
37
|
|
·
|
Aging
population. The incidence of urological disorders increases with age.
The over-40 age group in the United States is growing almost twice
as fast
as the overall population. Accordingly, the number of individuals
developing urological disorders is expected to increase significantly
as
the population ages and as life expectancies continue to
rise.
|
|
|
·
|
Increased
consumer awareness. In recent years, the publicity associated with
new technological advances and new drug therapies has increased the
number
of patients visiting their urologists to seek treatment for urological
disorders.
|
Urigen
N.A. has been established as a specialty pharmaceutical company to develop
and
commercialize products for the treatment and diagnosis of urological disorders.
We have established an initial group of clinical stage products, as more fully
described below, that we believe offer potential solutions to underserved
urology markets.
Urigen
N.A. is a specialty pharmaceutical company dedicated to the development and
commercialization of therapeutic products for urological disorders. Our two
lead
programs target significant unmet medical needs and major market opportunities
in urology. Our URG101 project targets painful bladder syndrome which affects
approximately 10.5 million men and women in North America. URG101 has
demonstrated safety and activity in a Phase IIa (open-label) human clinical
trial and in a Phase IIb double-blind, placebo-controlled trial. URG101 is
a
unique, proprietary combination therapy of components approved by global
regulatory authorities that is locally delivered to the bladder for rapid relief
of pain and urgency. In 2007, URG101 clinical development will encompass a
pharmacodynamic study. We have also begun to develop additional indications
for URG101 focusing on radiation cystitis and dyspareunia (painful
intercourse).
Our clinical-stage
projects, URG301 and URG302, target acute urgency in patients diagnosed with
an
overactive bladder, another major unmet need that is insufficiently managed
by
presently available overactive bladder drugs. URG301 and URG302 are proprietary
dosage forms of approved drugs that are locally delivered to control urinary
urgency. An Urigen N.A. sponsored Investigational New Drug, or IND, is currently
being prepared with subject enrollment scheduled for late 2007. We also plan
to
initiate two clinical programs targeting the use of URG301 in patients diagnosed
with acute urethral discomfort, or AUD, associated with cystoscopy and
urethritis.
To
expand
the pipeline, we have initiated discussions with pharmaceutical companies that
have either an approved product or a product in development for the treatment
of
additional urological indications. We believe that our URG100 and URG300
programs, when commercialized, will offer significant “marketing coat-tails”
that can dramatically grow the sales of niche urology products. Although such
products do not match the potential revenue streams of URG101 and URG301, the
incremental income they could generate for us is potentially significant as
such
products will enable us to maximize the time, effort and expense of the sales
organization that we plan to establish to market URG101 and URG301 to urologists
in the United States.
We
plan
to market our products to urologists and urogynecologists in the United States
via a specialty sales force managed internally. As appropriate, our specialty
sales force will be augmented by co-promotion and licensing agreements with
pharmaceutical companies that have the infrastructure to market our products
to
general practitioners. In all other countries, we plan to license marketing
and
distribution rights to its products to pharmaceutical companies with strategic
interests in urology and gynecology.
38
Results
of Operations
Fiscal
Years Ended June 30, 2007, 2006 and 2005
Revenue
Revenue
recognized in the fiscal years ended June 30, 2007, 2006 and 2005 is
as follows (in thousands):
|
Year ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
License
and milestone revenue:
|
||||||||||||
|
GeneSwitch®
gene regulation licenses
|
$ |
83
|
$ |
393
|
$ |
1,021
|
||||||
|
PINC™
gene delivery technology licenses
|
33
|
114
|
619
|
|||||||||
|
PEGylation
technology licenses
|
85
|
120
|
—
|
|||||||||
|
Manufacturing
technology license
|
370
|
—
|
—
|
|||||||||
|
571
|
627
|
1,640
|
||||||||||
|
Contract
research revenue
|
—
|
100
|
476
|
|||||||||
|
Other
revenue
|
—
|
—
|
61
|
|||||||||
|
Total
|
$ |
571
|
$ |
727
|
$ |
2,177
|
||||||
Changes
in revenue for each of the fiscal years ended June 30, 2007, 2006 and
2005 are explained below:
|
|
·
|
The
GeneSwitch® revenue recognized in fiscal 2007, 2006 and 2005 resulted
primarily from license and annual license maintenance fees received
under
several agreements for our GeneSwitch® technology. The GeneSwitch® revenue
recognized in fiscal 2005 included approximately $500,000 of license
fees received from Schering AG that was non-recurring. In
February, 2007, we completed the sale of all of our patents and
intellectual property related to the GeneSwitch® gene regulation
technology.
|
|
|
·
|
The
PINC™ gene delivery technology revenue recognized in fiscal 2007,
2006 and 2005 resulted primarily from license and annual license
maintenance fees received under several agreements for our PINC™ gene
delivery technology. The PINC™ gene delivery technology revenue recognized
in fiscal 2005 included approximately $500,000 of license fees
received from Schering AG that was non-recurring. In October 2006, we
sold all of our patents and intellectual property related to the
PINC™
gene delivery technology.
|
|
|
·
|
The
PEGylation revenue recognized in fiscal 2007 and 2006 primarily
reflected the licensing of our pegylated liposome technology. The
decrease
in PEGylation revenue recognized in fiscal 2007 as compared to 2006
primarily reflected that certain revenue recognized in 2006 was
non-recurring.
|
|
|
·
|
In
April 2007, we granted a worldwide, exclusive right and license to
Acacia
Patent Acquisition Corporation, or APAC, for the purpose of asserting
our
patents related to our plasmid DNA manufacturing technology. Under
the
agreement, APAC agreed to pay us a continuing royalty equal to fifty
percent of all amounts and other consideration actually received
by APAC
from its exercise of rights granted in the license. The manufacturing
technology revenue recognized in fiscal 2007 reflected license fees
received from other companies prior to the agreement with
APAC.
|
|
|
·
|
In
fiscal 2006 and 2005, we recognized $100,000 and $476,000 of contract
research revenue under agreements with other companies, respectively.
Under the agreements, we were required to conduct research on the
manufacturing of certain biological materials for other companies.
The
revenue was recognized based on research performed during the periods.
We
did not conduct any contract research in fiscal
2007.
|
|
|
·
|
Other
revenue recognized in fiscal 2005 consisted primarily of profit
sharing and royalties received under a plasmid DNA manufacturing
agreement.
|
The
Company does not expect to have revenues from its URG101 or URG 301 product
lines until 2010.
39
Costs
and Expenses
We
did
not conduct any contract research during fiscal year ended
June 30, 2007. Costs of contract research were $93,000 and $521,000
for fiscal years ended June 30, 2006 and 2005, respectively, which
consisted of costs incurred for contract research on the manufacturing of
biological materials for other companies and included direct and related
overhead expenses and costs of general and administrative support.
Research
and development expenses were $872,000, $10.8 million and $8.8 million for
the fiscal years ended June 30, 2007, 2006 and 2005, respectively. The
decrease in expenses in fiscal 2007 compared to 2006 was attributable to
the cessation of our research and development activities following the
announcement of negative results in our VLTS 934 Phase IIb clinical
trial in July 2006. The increase in expenses in fiscal 2006 compared
to 2005 primarily reflects increased expenses related to VLTS 934
Phase IIb clinical trial and stock-based compensation expenses recorded in
the year ended June 30, 2006. We expect research and development
expenses to increase going forward from the levels of fiscal 2007 as we pursue
the development of our potential products for the treatment of urological
disorders.
All
of
our research and development expenses for the fiscal years ended
June 30, 2007, 2006 and 2005 were incurred in connection with the
development of novel peripheral arterial disease therapeutics.
General
and administrative expenses were $4.8 million, $5.4 million and
$4.1 million for the fiscal years ended June 30, 2007, 2006 and
2005 respectively. The decrease in expenses in fiscal 2007 compared to 2006
was primarily attributable to the reduction of workforce following the
announcement of negative results in our VLTS 934 Phase IIb clinical
trial in July 2006, partially offset by merger related expenses incurred in
fiscal 2007. The increase in expenses in fiscal 2006 compared to
2005 was primarily attributable to stock-based compensation expenses recorded
in
fiscal 2006. We expect general and administrative expenses to decrease going
forward from the levels of fiscal 2007.
Restructuring
Charges
Following
our announcement regarding the results of our clinical trial for VLTS 934
in July 2006, we announced restructuring activities, including a workforce
reduction of approximately 55% of our employees on August 18, 2006.
Further reductions of approximately 55% of our remaining workforce occurred
through the end of August and October 2006, including the termination of
employment of John J. Reddington, Ph.D., DVM., our Chief Operating Officer,
and
Joseph A. Markey, our Vice President of Finance and Administration on October
31, 2006. In July 2007, the Company terminated the employment of
Benjamin F. McGraw, III, our President, Chief Executive Officer and
Treasurer. The total costs associated with the reduction in workforce
were approximately $1.03 million, primarily related to severance benefits which
has been recognized as restructuring charges and $921,000 has been paid as
of June 30, 2007. The remaining unpaid amount of $108,000
as of June 30, 2007 was paid in July 2007.
Interest
Income
Interest
income was approximately $39,000, $279,000 and $285,000 in fiscal 2007,
2006 and 2005, respectively. The decrease in interest income in fiscal 2007
compared to 2006 and the decrease in interest income in fiscal 2006
compared to 2005 were primarily attributable to lower interest income derived
from lower investment balances.
Other
Income and Expense, net
For
the
year ended June 30, 2007, other income and expenses, net primarily
reflected nonrefundable proceeds received from the sale of most of our remaining
potential products and technologies related to cardiovascular therapeutics
and
gene delivery and expression systems and gains from sale of most of our
remaining machinery, equipment and furniture and fixtures totaling approximately
$2.3 million. These proceeds received or gains on sales were recognized
when payments were received, provided Valentis had no future performance or
delivery obligations under the agreements. In addition, these proceeds received
or gains were classified in other income and expenses, net because asset sales
were part of the Company’s efforts to pursue strategic opportunities, which
included the merger with Urigen N.A., the sale of certain assets and other
actions. Other income and expense, net were expenses of approximately $35,000
and $92,000 in fiscal 2006 and 2005, respectively. These expenses were
primarily franchise tax payments.
40
New
Accounting Pronouncements
In
February 2006, the FASB issued Statement of Financial Accounting Standards
No. 155, Accounting for Certain Hybrid Financial Instruments — an
amendment of FASB Statements No. 133 and 140 (“SFAS No. 155”).
SFAS No. 155 permits an entity to measure at fair value any financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. This statement is effective for all financial instruments acquired,
issued, or subject to a remeasurement event occurring after the beginning of
an
entity’s first fiscal year that begins after September 15, 2006. The
Company does not expect the adoption of SFAS No. 155 to have a material
impact on its consolidated financial statements.
In
June 2006, the FASB issued FASB Interpretation No. (FIN) 48,
Accounting for Uncertainty in Income Taxes — An Interpretation of FASB
Statement No. 109 (“FIN48”), which prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 will be effective for fiscal years beginning after December 15, 2006.
The Company does not expect the adoption of FIN48 to have a material impact
on
its consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements “(SFAS No. 157)”, which
defines fair value, establishes a framework for measuring fair value under
Generally Accepted Accounting Principles (“GAAP”), and expands disclosures about
fair value measurements. SFAS No. 157 will be effective for fiscal years
beginning after November 15, 2007. The Company does not expect the adoption
of SFAS No. 157 to have a material impact on its consolidated financial
statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB
108”), “Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB 108 is effective for
fiscal years ending on or after November 15, 2006 and addresses how
financial statement errors should be considered from a materiality perspective
and corrected. The literature provides interpretive guidance on how the effects
of the carryover or reversal of prior year misstatements should be considered
in
quantifying a current year misstatement. Historically there have been two common
approaches used to quantify such errors: (i) the “rollover” approach, which
quantifies the error as the amount by which the current year income statement
is
misstated, and (ii) the “iron curtain” approach, which quantifies the error
as the cumulative amount by which the current year balance sheet is misstated.
The SEC Staff believes that companies should quantify errors using both
approaches and evaluate whether either of these approaches results in
quantifying a misstatement that, when all relevant quantitative and qualitative
factors are considered, is material. The Company adopted the provisions of
SAB
108 in fiscal year ended June 30, 2007 and it had no impact on its
consolidated financial statements.
In
February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 creates a “fair value option” under
which an entity may elect to record certain financial assets or liabilities
at
fair value upon their initial recognition. Subsequent changes in fair value
would be recognized in earnings as those changes occur. The election of the
fair
value option would be made on a contract-by contract basis and would need to
be
supported by concurrent documentation or a preexisting documented policy. SFAS
159 requires an entity to separately disclose the fair value of these items
on
the balance sheet or in the footnotes to the financial statements and to provide
information that would allow the financial statement user to understand the
impact on earnings from changes in the fair value. SFAS 159 is effective as
of
the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The Company does not expect the adoption of SFAS
No. 159 to have a material impact on its consolidated financial
statements.
41
Liquidity
and Capital Resources
As
discussed elsewhere in this report, including further below, we have received
a
report from our independent registered public accounting firm regarding the
consolidated financial statements for the fiscal year ended
June 30, 2007 that includes an explanatory paragraph stating that the
financial statements have been prepared assuming we will continue as a going
concern. The explanatory paragraph states the following conditions, which raise
substantial doubt about our ability to continue as a going concern: (i) we
have incurred operating losses since inception, including a net loss of
$3.7 million for the fiscal year ended June 30, 2007,
negative cash flows from operations of $4.5 million for the fiscal year
ended June 30, 2007, and our accumulated deficit was
$243.7 million at June 30, 2007 and (ii) we anticipate
requiring additional financial resources to enable us to fund the completion
of
our development plan. These funds may be derived from the sale of a current
license, licensing and distribution agreements outside the U.S., and
additional financing. See description of funds raised from a July
2007 equity financing in Note 16 to the consolidated financial statements.
We
expect these funds to allow the Company to carry-on operations until at least
the end of fiscal year 2008. Management’s plans as to these matters are also
described in Note 1 to the consolidated financial statements.
If
we are
unable to obtain the required additional financial resources to enable us to
fund the completion of the strategic opportunities that may be available to
us,
or if we are otherwise unsuccessful in completing any strategic alternative,
our
business, results of operation and financial condition would be materially
adversely affected and we may be required to seek bankruptcy
protection.
On
July 11, 2006, we announced that no statistically significant
difference was seen in the primary endpoint or any of the secondary endpoints
in
our Phase IIb clinical trial of VLTS 934 in PAD. We have no plans for
further development of VLTS 934 or any of our other remaining potential products
related to cardiovascular therapeutics and gene delivery and expression systems.
We are currently focused on the design and implementation of innovative products
for patients with urological ailments including, specifically, the development
of innovative products for amelioration of Painful Bladder Syndrome or
PBS.
Since
our
inception, we have financed our operations principally through public and
private issuances of our common and preferred stock and funding from
collaborative arrangements. We have used the net proceeds from the sale of
the
common and preferred stock for general corporate purposes, which have included
funding research, development and product manufacturing, increasing our working
capital, reducing indebtedness, pursuing and completing acquisitions or
investments in businesses, products or technologies that are complementary
to
our own, and capital expenditures. We expect that proceeds received from any
future issuance of stock will be used for similar purposes.
In
January and June 2004, June 2005 and March 2006, we
completed four separate private placements of common stock for gross proceeds
of
approximately $10.0 million, $12.0 million, $4.2 million and $5.3
million, respectively. In connection with these private placements, we entered
into registration rights agreements with the purchasers of our common stock.
Pursuant to each of the registration rights agreements, we filed with the SEC
registration statements related to the shares issued to the purchasers and
shares issuable upon the exercise of the warrants under the respective private
placements. In the event that we must suspend use of any registration statement
for greater than 20 consecutive days or a total of 40 days in the
aggregate during the time we are required to keep such registration statement
effective under the applicable registration rights agreement, then we must
pay
to each applicable purchaser in cash 1.0% of the purchaser’s aggregate purchase
price of the shares for the first month, as well as an additional 1.5% of the
purchaser’s aggregate purchase price for each additional month thereafter, while
the use of such registration statement has been suspended. We currently expect
to be required to maintain availability of the registration statements for
at
least two years following the applicable closing of the private
placements.
In
addition, under the securities purchase agreements entered into in connection
with the private placements completed in June 2005 and March 2006,
while there is an effective registration statement if we fail to deliver a
stock
certificate that is free of restrictive legends within three trading days upon
delivery of such a request by a purchaser, we are required to pay to the
purchaser, for each $1,000 of shares of stock or shares issuable upon exercise
of warrants requested, $10 per trading day for each trading day beginning five
trading days after the delivery of the request, increasing to $20 per trading
day after the first five trading days for which such damages have begun to
accrue, until such certificate is delivered without restrictive
legends.
42
In
January 2007, Valentis terminated its existing property leases without any
material adverse effect and moved to a nearby office space on a month-to-month
basis. Upon the completion of the merger with Urigen N.A. in July 2007, the
Company relocated to Urigen N.A.’s office facilities in Burlingame, California.
The combined company currently subleases office facilities on a month-to-month
basis at a rate of $2,683 per month from EGB Advisors, LLC. EGB Advisors, LLC
is
owned solely by William J. Garner, President and CEO of Urigen Pharmaceuticals,
Inc. The sublease is terminable upon 30 days’ notice.
Our
capital expenditures were $0, $33,000 and $8,000 in fiscal 2007, 2006 and 2005,
respectively. We expect our capital expenditures going forward to be near or
at
current levels.
Net
cash
used in operating activities for the year ended June 30, 2007 was
approximately $4.5 million, which primarily reflected the net loss of
$3.7 million, adjusted for non-cash stock-based compensation expenses of
$1.3 million, gains on disposal of assets of $582,000 and the net decrease
in
operating assets and liabilities of $1.5 million. Net cash used in operating
activities for the year ended June 30, 2006 was approximately
$13.2 million, which primarily reflected the net loss of
$15.3 million, adjusted for non-cash stock-based compensation expenses of
$1.5 million and the decreases in receivable, deposits and other assets of
$700,000. Net cash used in operating activities for the year ended
June 30, 2005 was approximately $12.1 million, which primarily
reflected the net loss of $11.1 million and the decreases in accrued
liabilities of $1.3 million related to compensation and clinical trial
expenses.
Net
cash
provided by investing activities was approximately $1.4 million for the
fiscal year ended June 30, 2007, which primarily reflected the
proceeds received from disposal of assets of $604,000 and maturities of
available-for-sale investments of $750,000. Net cash provided by investing
activities was approximately $2.9 million and $7.3 million for the
fiscal years ended June 30, 2006 and 2005, respectively, which
primarily reflected the maturities of available-for-sale
investments.
Net
cash
used by financing activities was approximately $11,000 for the fiscal year
ended
June 30, 2007, which primarily reflected the repurchase of our common
stock. Net cash provided by financing activities was approximately
$5.0 million and $4.1 million for the fiscal years ended
June 30, 2006 and 2005, respectively, which consisted primarily of net
proceeds received from private placements of our common stock and
warrants.
The
accompanying consolidated financial statements have been prepared assuming
that
we will continue as a going concern. 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 matters discussed above.
Critical
Accounting Policies
Clinical
trial expenses
We
believe the accrual for clinical trial expense represents our most significant
estimate used in the preparation of the consolidated financial statements.
Our
accruals for clinical trial expenses are based in part on estimates of services
received and efforts expended pursuant to agreements established with clinical
research organizations and clinical trial sites. We have a history of
contracting with third parties that perform various clinical trial activities
on
our behalf in the ongoing development of our biopharmaceutical drugs. The
financial terms of these contracts are subject to negotiations and may vary
from
contract to contract and may result in uneven payment flows. We determine our
estimates through discussion with internal clinical personnel and outside
service providers as to progress or stage of completion of trials or services
and the agreed upon fee to be paid for such services. The objective of our
clinical trial accrual policy is to reflect the appropriate trial expenses
in
our financial statements by matching period expenses with period services and
efforts expended. In the event of early termination of a clinical trial, we
accrue expenses associated with an estimate of the remaining, non-cancelable
obligations associated with the winding down of the trial. Our estimates and
assumptions for clinical trial expenses have been materially accurate in the
past. Following the Company’s July 2006 announcement regarding the negative
results of its Phase IIb clinical trial of VLTS 934 in patients with
PAD, the Company ceased all research and development activities on all of its
potential gene therapy products and technologies. However, we expect clinical
trial expenses to continue to represent a critical accounting policy for our
Company, as we commence testing in fiscal year 2008 of our urological product
candidates.
43
Revenue
Recognition
Revenue
arrangements with multiple elements are divided into separate units of
accounting if certain criteria are met, including whether the delivered item
has
value to the customer on a stand-alone basis and whether there is objective
and
reliable evidence of the fair value of the undelivered items. Consideration
received is allocated among the separate units of accounting based on their
respective fair values, and the applicable revenue recognition criteria are
considered separately for each of the separate units.
Non-refundable
up-front payments received in connection with research and development
collaboration agreements, including technology advancement funding that is
intended for the development of our core technology, are deferred and recognized
on a straight-line basis over the relevant period specified in the agreement,
generally the research term.
Revenue
related to research with our corporate collaborators is recognized as research
services are performed over the related funding periods for each contract.
Under
these agreements, we are required to perform research and development activities
as specified in each respective agreement. The payments received under each
respective agreement are not refundable and are generally based on a contractual
cost per full-time equivalent employee working on the project. Research and
development expenses under the collaborative research agreements approximate
or
exceed the revenue recognized under such agreements over the terms of the
respective agreements. Deferred revenue may result when we do not incur the
required level of effort during a specific period in comparison to funds
received under the respective contracts. Payments received relative to
substantive, at-risk incentive milestones, if any, are recognized as revenue
upon achievement of the incentive milestone event because we have no future
performance obligations related to the payment. Incentive milestone payments
are
triggered either by results of our research efforts or by events external to
us,
such as regulatory approval to market a product. Following our July 2006
announcement regarding the negative results in our Phase IIb clinical trial
of VLTS 934 in patients with PAD, we ceased all research and development
activities on all of our potential gene therapy products and technologies,
including under our agreements with corporate collaborators.
We
also
have licensed technology to various biotechnology, pharmaceutical and contract
manufacturing companies. Under these arrangements, we receive nonrefundable
license payments in cash. These payments are recognized as revenue when
received, provided we have no future performance or delivery obligations under
these agreements. Otherwise, revenue is deferred until performance or delivery
is satisfied. Certain of these license agreements also provide the licensee
an
option to acquire additional licenses or technology rights for a fixed period
of
time. Fees received for such options are deferred and recognized at the time
the
option is exercised or expires unexercised. Additionally, certain of these
license agreements involve technology that we have licensed or otherwise
acquired through arrangements with third parties pursuant to which we are
required to pay a royalty equal to a fixed percentage of amounts received by
us
as a result of licensing this technology to others. Such royalty obligations
are
recorded as a reduction of the related revenue. Furthermore, we receive royalty
and profit sharing payments under a licensing agreement with a contract
manufacturing company. Royalty and profit sharing payments are recognized as
revenue when received. We are not currently providing contract research services
for research and development manufacturing of biological materials for other
companies.
Stock-Based
Compensation
In
December 2004, the FASB issued FAS 123R, “Share-Based Payment.”
FAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued
to Employees,” and requires companies to recognize compensation expense, using a
fair-value based method, for costs related to share-based payments including
stock options and employee stock purchase plans. We adopted
FAS 123(R) on July 1, 2005. Prior to the adoption, we
disclosed such expenses on a pro forma basis in the notes to our financial
statements. For the year ended June 30, 2007, we recorded
approximately $1.34 million of stock-based compensation expenses, of which
$164,000 was included in research and development expense and $1.17 million
was
included in general and administrative expense. For the year ended
June 30, 2006, we recorded approximately $1.4 million of employee
stock-based compensation expenses, of which $503,000 was included in research
and development expense and $944,000 was included in general and administrative
expense.
44
We
did
not grant any stock-based awards during the year ended June 30, 2007.
We estimated the fair value of stock options granted during the year ended
June 30, 2006 using the Black-Scholes-Merton option pricing model. The
weighted-average assumptions used under this model were as follows: 1) Due
to
insufficient relevant historical option exercise data, the expected term of
the
options was estimated to be 6.1 years using the “simplified” method
suggested in the Securities and Exchange Commission’s Staff Accounting Bulletin
No. 107; 2) Expected volatility was estimated to be 143% based on the
Company’s historical volatility that matched the expected term; 3) Risk-free
interest rate of 4.5% is based on the U.S. Treasury yield curve in effect at
the
time of grant for periods corresponding with the expected term of the option;
4)
The Company assumed a zero percent dividend yield. In addition, under
FAS 123R, fair value of stock options granted is recognized as expense over
the vesting period, net of estimated forfeitures. Estimated annual forfeiture
rate was based on historical data and anticipated future conditions. The
estimation of forfeitures requires significant judgment, and to the extent
actual results or updated estimates differ from our current estimates, such
amounts will be recorded in the period estimates are revised (See Note 2
“Stock-Based Compensation” in our Notes to the Consolidated Financial Statements
for more information).
Contractual
Obligations
In
January, 2007, the Company terminated its existing property leases without
any
material adverse effect and moved to a nearby office space on a month-to-month
basis. Upon the completion of the merger with Urigen N.A. in July 2007, the
Company relocated to Urigen N.A.’s office facilities in Burlingame, California.
The combined company currently subleases office facilities on a month-to-month
basis at a rate of $2,683 per month from EGB Advisors, LLC. EGB Advisors, LLC
is
owned solely by William J. Garner, President and CEO of Urigen Pharmaceuticals,
Inc. The sublease is terminable upon 30 days’ notice.
Off
Balance Sheet Arrangements
At
June 30, 2007 and 2006, we did not have any off balance sheet
arrangements other than the month-to-month lease described in contractual
obligations above.
Valentis’
exposure to market risk for changes in interest rates relates primarily to
our
investment portfolio. We maintain a strict investment policy that is designed
to
limit default risk, market risk, and reinvestment risk. Our cash and cash
equivalents consist of cash and money market accounts. Our investments consist
primarily of commercial paper, medium term notes, U.S. Treasury notes and
obligations of U.S. Government agencies and corporate bonds. The table below
presents notional amounts and related weighted-average interest rates for our
investment portfolio (in thousands, except percentages) as of June 30, 2007
and 2006. All of our market risk sensitive instruments mature within a year
from
the balance sheet date.
|
As of June 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Cash
and cash equivalents
|
||||||||
|
Estimated
market value
|
$ |
478
|
$ |
3,635
|
||||
|
Average
interest rate
|
5.20 | % | 4.96 | % | ||||
|
Short-term
investments
|
||||||||
|
Estimated
market value
|
$ |
―
|
$ |
750
|
||||
|
Average
interest rate
|
―
|
4.97 | % | |||||
|
Total
cash and cash equivalents and investment securities
|
$ |
478
|
$ |
4,385
|
||||
|
Average
rate
|
5.20 | % | 4.97 | % | ||||
45
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our
Financial Statements and notes thereto appear on pages 65 to 87 of this
Annual Report on Form 10-K.
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL
DISCLOSURE
|
On
July
16, 2007, we dismissed Ernst & Young LLP (“E&Y”) as our independent
registered public accounting firm. The decision to dismiss E&Y was approved
by our Board of Directors.
The
reports of E&Y on our consolidated financial statements for the years ended
June 30, 2006 and 2005 did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope,
or
accounting principles, except for it did include explanatory
paragraphs in 2006 and 2005 describing conditions that raise substantial doubt
about our ability to continue as a going concern as described in Note 1 to
the
consolidated financial statements and an explanatory paragraph for the adoption
of Statement of Financial Accounting Standards No. 123(R), “ Share-Based
Payment” in 2006.
In
connection with the audits of our financial statements for the years ended
June
30, 2006 and 2005 and through July 16, 2007, there were no disagreements with
E&Y on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures which, if not resolved
to
the satisfaction of E&Y would have caused E&Y to make reference to the
matter in their report.
On
July
16, 2007, we engaged Burr, Pilger & Mayer LLP as our new independent
registered public accounting firm to replace E & Y subsequent to
June 30, 2007 upon consummation of the Merger. During the three most recent
fiscal years and through July 16, 2007, the Company did not consult with
Burr, Pilger & Mayer LLP regarding (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the
type
of audit opinion that might be rendered on our consolidated financial
statements, and no written report or oral advice was provided to us by
concluding there was an important factor to be considered by us in reaching
a
decision as to an accounting, auditing or financial reporting issue; or
(ii) any matter that was either the subject of a disagreement, as that term
is defined in Item 304(a)(1)(iv) of Regulation S-B and the related
instructions in Item 304 of Regulation S-K, or a reportable event, as
that term is defined in Item 304 of
Regulation S-B.
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures. The Securities and Exchange
Commission defines the term “disclosure controls and procedures” to mean a
company’s controls and other procedures that are designed to ensure that
information required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and
reported, within the time periods specified in the Commission’s rules and forms.
Our chief executive officer and chief financial officer have concluded, based
on
the evaluation of the effectiveness of the disclosure controls and procedures
by
our management, with the participation of our chief executive officer and
chief
financial officer, as of the end of the period covered by this report, that
our
disclosure controls and procedures were effective for this purpose, except
as
noted below under “Changes in Internal Controls.”
Changes in Internal Controls. In connection with its audit of our
consolidated financial statements for the year ended June 30, 2007, Burr,
Pilger & Mayer LLP identified significant deficiencies, which represent
material weaknesses. The material weaknesses were related to a lack of adequate
segregation of duties. In addition, significant audit adjustments were needed
to
accrued expenses that were the result of an insufficient quantity of experienced
resources involved with the financial reporting and year end closing process
resulting from staff reductions associated with the downsizing of the
Company. The Company is in the process of conducting a search for
qualified individuals for its accounting and financial reporting
positions.
46
Prior to the issuance of our consolidated financial statements, we completed
the
account reconciliations, analyses and our management review such that we
can
certify that the information contained in our consolidated financial statements
for the year ended June 30, 2007, fairly presents, in all material respects,
the
financial condition and results of operations of the Company.
Limitations on Effectiveness of Controls and Procedures. Our
management, including our chief executive officer and chief financial officer,
does not expect that our disclosure controls and procedures or our 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, but are not limited to, the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of 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 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.
|
ITEM
9B.
|
OTHER
INFORMATION
|
None.
47
|
ITEM
10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
Executive
Officers and Directors
Upon
consummation of the Merger, the Compay's sole officer, Benjamin F. McGraw,
was
terminated as the Company's Chief Executive Officer, President, Treasurer,
and
Secretary. The following table lists the names and ages and positions of our
current executive officers and directors. . Each of the executive
officers was appointed on July 16, 2007.
|
Name
|
|
|
|
Age
|
|
Position
|
|
William
J. Garner, M.D.
|
|
41
|
|
President,
Chief Executive Officer and Director
|
||
|
Martin
E. Shmagin
|
|
57
|
|
Chief
Financial Officer and Director
|
||
|
Terry
M. Nida
|
|
59
|
|
Chief
Operating Officer
|
||
|
Benjamin
F. McGraw, III, Pharm.D.
|
|
58
|
|
Chairman
of the Board
|
||
|
George
M. Lasezkay, Pharm.D, J.D.
|
|
55
|
|
Director
|
||
|
Tracy
Taylor
|
53
|
Director
|
||||
|
C.
Lowell Parsons
|
63
|
Director
|
||||
The
principal occupations and positions for the past five years, and in some cases
prior years, of the executive officers and directors named above, are as follows
unless set forth elsewhere in this report:
William
J. Garner, M.D.,41, was appointed President and Chief
Executive Officer on July 13, 2007. Prior to that date, Dr. Garner
was President and Chief Executive Officer of Urigen N.A.,
Inc. Dr. Garner is an experienced entrepreneur. Prior to
founding Urigen N.A., Dr. Garner had been the founder and managing director
of EGB Advisors, LLC, a pharmaceutical commercialization boutique. Through
this entity, Dr. Garner worked on a number of biopharmaceutical business
transactions and has raised financing for another company that he founded called
Inverseon, Inc., developing a novel therapy for asthma. Before this,
Dr. Garner worked in medical affairs at Hoffmann LaRoche in oncology. Prior
to Hoffmann LaRoche, Dr. Garner was in the venture capital department at
Paramount Capital Investments in New York City. Dr. Garner has a Master of
Public Health from Harvard and received his M.D. degree from New York Medical
College. Dr. Garner did residency training in Anatomic Pathology at
Columbia-Presbyterian and is currently a licensed physician in the State of
New
York.
Martin
E. Shmagin,57, was appointed as our
Chief Financial Officer on July 13, 2007. Prior to that date, Mr. Shmagin served
as Chief Financial Officer of Urigen N.A., Inc. For over ten years
Mr. Shmagin served as president of Innovative Financial Solutions Ltd., an
accounting and financial consulting firm that serves as chief financial officer
and controller for start-up through mid-size businesses. From 1978 to 1986,
Mr. Shmagin was vice president, Finance/chief financial officer of
Fisher & Brother, Inc. From 1986 to 1989, he was comptroller of
Strober Bros., Inc. and supported the company’s successful initial public
offering. He then opened his own consulting firm where he assisted Stenograph
Corporation with its acquisition of Baron Data Corporation and Hanover Direct
with its acquisition of Gumps. He also supported a $24 million global systems
conversion of American President Companies, Ltd., a $2.6 billion transportation
company, where he coordinated the data conversion of eighty-three subsidiaries
in multiple currencies. Mr. Shmagin holds a B.S. degree in accounting from
New York University.
Terry
M. Nida,59, was appointed as Chief Operating
Officer on July 13, 2007. Prior to that, Mr. Nida served as Urigen N.A.,
Inc.’s vice president for sales, marketing and corporate development. Prior to
joining Urigen, Mr. Nida served as vice president, worldwide sales,
marketing and corporate development for VIVUS, Inc. From November 1995
to August 1998, Mr. Nida was vice president, Europe, and effective
March 28, 1996 was appointed as an executive officer. Prior to joining
VIVUS, Mr. Nida was vice president, sales, marketing and business
development at Carrington Laboratories, with responsibility for all sales,
marketing and business development activities. Mr. Nida was senior
director, worldwide sales, marketing and business development for
Centocor, Inc. from 1993 to 1994, and director of sales and marketing in
Europe for Centocor, Inc. from 1990 to 1993. He holds a B.S. degree in
english and an M.A. degree in administration of justice from Wichita State
University.
48
Benjamin
F. McGraw, III, Pharm.D.
Benjamin
F. McGraw, III, Pharm.D., 58, served as the President and Chief Executive
Officer of Valentis from September 1994, when he joined Megabios
Corp., and as Chairman since May 1997. Effective upon the closing of the
Merger on July 13, 2007, Dr. McGraw resigned as President and Chief Executive
Officer. In March 1999, Megabios merged with GeneMedicine, Inc. to
form Valentis. Prior to Megabios, Dr. McGraw gained experience in R&D
as Vice President, Development for Marion and Marion, Merrell Dow; in business
development as Corporate Vice President, Corporate Development at
Allergan, Inc.; and in finance as President of Carerra Capital Management.
Dr. McGraw currently serves on the board of directors of ISTA
Pharmaceuticals, Inc. Dr. McGraw received his Doctor of Pharmacy from
the University of Tennessee Center for the Health Sciences, where he also
completed a clinical practice residency.
Tracy
Taylor,
53,
a director of Urigen and
serves as president and chief executive officer of Kansas Technology Enterprise
Corporation, or KTEC, a private-public partnership dedicated to stimulating
technology-based economic development in the State of Kansas. Mr. Taylor’s
extensive corporate and entrepreneurial experience has been integral to the
success of KTEC.
After
his
initial position in corporate finance at Ford Motor Company, Mr. Taylor
jointed United Telecom in 1982 to work on the company’s mergers and
acquisitions. Less than two years later, Mr. Taylor was selected to a
12-person team that developed a business plan for what eventually became the
Sprint Corporation. As Sprint grew into a Fortune 100 company, Mr. Taylor
played a leadership role in the management side, serving as the treasurer of
US
Sprint. Mr. Taylor led the regional site selection for Sprint’s World
Headquarters in Overland Park, Kansas, which covers over 300 acres and holds
more than 16,000 employees. Mr. Taylor graduated from Bethany College and
received his M.B.A. degree from the University of Kansas. Mr. Taylor’s
experience in business, entrepreneurial endeavors and technology-oriented
business growth place him in a position to contribute to a wide variety of
boards and organizations. While Mr. Taylor has served on several boards
across the state and country, his most recent contributions have been on the
Enterprise Center of Johnson County, a working incubator focused on the
commercialization of technology; Mid-America Manufacturing Technology Center
(MAMTC); KansasBio; and Catalyst Lighting, a publicly-traded company.
Mr. Taylor has served on Urigen N.A., Inc.’s board of directors since
December 2005.
C.
Lowell Parsons,
M.D., 63, a
director of Urigen, is a leader in medical research into the causes and
treatment of interstitial cystitis, which is a painful bladder syndrome with
typical cystoscopic and/or histological features in the absence of infection
or
other pathology, and has published over 200 scientific articles and book
chapters in this area describing his work. Dr. Parsons received his M.D.
degree from the Yale University School of Medicine in New Haven, CT, in 1970.
After completing his medical internship at Yale in 1971, Dr. Parsons spent
two years as a staff associate in the Laboratory of Microbiology at the National
Institutes of Health in Bethesda, Maryland. He then completed his urology
residency training at the Hospital of the University of Pennsylvania in
Philadelphia, Pennsylvania, in 1977. Dr. Parsons joined the Division of
Urology faculty at the University of California, San Diego, or UCSD, in 1977
as
assistant professor. He served as Chief of Urology at the UCSD-affiliated
Veterans Affairs Medical Center in La Jolla from 1977 to 1985. Since 1988,
he has been Professor of Surgery/Urology.
49
George
M.
Lasezkay, Pharm.D.
George
M.
Lasezkay, Pharm.D., 55, has served as one of our directors since
May 2004. Since September 2003, Dr. Lasezkay has provided
business development and strategic advisory services to biotechnology and
emerging pharmaceutical companies through his consulting firm, Turning Point
Consultants. From 1989 to 2002, Dr. Lasezkay served in various positions at
Allegan, Inc., including Assistant General Counsel from 1994 to 1996, Vice
President, Corporate Development from 1996 to 1998, and Corporate Vice
President, Corporate Development from 1998 to 2002. Dr. Lasezkay currently
serves on the board of directors of Collagenex Pharmaceuticals, Inc. and a
number of privately-held companies. Dr. Lasezkay received his J.D. from the
University of Southern California Law Center and his Doctor of Pharmacy and
Bachelor of Science in Pharmacy from the State University of New York at
Buffalo.
Former
Directors
In
connection with the closing of the Merger on July 13, 2007, Patrick G. Enright,
Dennis J. Purcell, John S. Schroeder, MD and Reinaldo M. Diaz , resigned as
directors of the Company.
Committees
of the Board of Directors
Our
Board
of Directors has a standing Audit Committee, Compensation Committee and
Nominating Committee.
Audit
Committee
The
Audit
Committee meets with the independent auditors at least annually to review the
results of the annual audit and discuss the financial statements, recommends
to
the Board of Directors the independent auditors to be retained and receives
and
considers the accountants’ comments as to controls, adequacy of staff and
management performance and procedures in connection with audit and financial
controls. The Audit Committee also meets with the independent auditors to review
the quarterly financial results and to discuss the results of the independent
auditors’ quarterly review and any other matters required to be communicated to
the Audit Committee by the independent auditors under generally accepted
auditing standards. During the fiscal year ended June 30, 2007, the Audit
Committee was composed of three independent non-employee directors:
Messrs. Enright and McDade and Dr. Lasezkay.
The
Board
of Directors intends to appoint new independent non-employee directors to the
Audit Committee to fill the vacancies on the Audit Committee created by the
resignations of Messrs. Enright and McDade. The Audit Committee
has adopted a written charter, a copy of which was included as an appendix
to
the proxy statement filed with the Securities and Exchange Commission for the
2004 Annual Meeting of Stockholders.
Compensation
Committee
The
Compensation Committee makes recommendations concerning salaries and incentive
compensation, awards stock options to employees and consultants under the
Company’s stock option plans and otherwise determines compensation levels and
performs such other functions regarding compensation as the Board of Directors
may delegate. During the fiscal year ended June 30, 2007, the
Compensation Committee was composed of three independent non-employee directors:
Messrs. McDade and Diaz and Dr. Lasezkay. The Board of Directors
determined that each member of the Compensation Committee is independent within
the meaning of the Nasdaq Stock Market’s director independence standards. The
Compensation Committee has adopted a written charter, a copy of which was
included as an appendix to the proxy statement filed with the Securities and
Exchange Commission for the 2004 Annual Meeting of Stockholders.
50
The
Board
of Directors intends to appoint new independent non-employee directors to the
Compensation Committee to fill the vacancies on the Compensation Committee
created by the resignations of Messrs. McDade and Diaz.
Nominating
and Governance Committee
The
Nominating and Governance Committee assists the Board of Directors in
discharging the Board of Directors’ responsibilities regarding identifying
qualified candidates to become members of the Board of Directors, selecting
candidates to fill any vacancies on the Board of Directors, ensuring that we
have and follow the appropriate governance standards and overseeing the
evaluation of the Board of Directors. During the fiscal year ended
June 30, 2007, the Nominating Committee was composed of three
independent non-employee directors: Messrs. Schroeder, M.D. and Purcell.
The Board of Directors has determined that each member of the Nominating
Committee is independent within the meaning of the Nasdaq Stock Market’s
director independence standards. The Nominating and Governance Committee has
adopted a written charter, a copy of which was included as an appendix to the
proxy statement filed with the Securities and Exchange Commission for the 2004
Annual Meeting of Stockholders.
The
Nominating Committee will consider and has adopted a policy with regard to
the
consideration of any director candidates recommended by security holders. The
Nominating Committee uses a process similar to that contained in the Nominating
Committee Charter for identifying and evaluating director nominees recommended
by our stockholders. In the fiscal year ended June 30, 2007, there
have been no material changes to the procedures by which security holders may
recommend nominees to the Board of Directors.
The
Board
of Directors intends to appoint new independent non-employee directors to the
Nominating and Governance Committee to fill the vacancies on the Nominating
and
Governance Committee created by the resignations of Messrs. Schroeder, M.D.
and Purcell.
Compensation
of Directors
The
current Company plan states that each of our non-employee directors receives
an
annual retainer of $12,000 and a per meeting fee of $1,000. The chairman of
the
Audit Committee receives an annual retainer of $6,000 and a per meeting fee
of
$800 and the other members of the Audit Committee receive an annual retainer
of
$4,000 and a per meeting fee of $500. The chairman of the Compensation Committee
receives an annual retainer of $3,500 and a per meeting fee of $800 and the
other members of the Compensation Committee receive an annual retainer of $2,500
and a per meeting fee of $500. The chairman of the Nominating Committee receives
an annual retainer of $2,000 and a per meeting fee of $500 and the other members
of the Nominating Committee receive an annual retainer of $1,500 and a per
meeting fee of $500. The members of the Board of Directors are also eligible
for
reimbursement for their expenses incurred in connection with attendance at
Board
of Directors and committee meetings.
Under
the
1998 Non-Employee Directors’ Stock Option Plan as amended and restated, on the
date following the date of the annual stockholders’ meeting of each year, each
non-employee director will automatically be granted, without further action
by
the Company, our stockholders or the Board of Directors, an option to purchase
10,000 shares of common stock. In addition, each new non-employee director
will
receive a one time grant to purchase 26,000 shares of common stock on the date
of the annual stockholders’ meeting at which such new director is first elected
to the Board of Directors. The exercise price of the options granted to the
non-employee directors is 100% of the fair market value of the common stock
on
the date of the option grant.
For
the
fiscal year ended June 30, 2007, directors were paid as follows:
|
Director
|
Total
|
Board
Member Fee
|
Board
Meeting Fee
|
Audit
Member Fee
|
Audit
Meeting Fee
|
Compensation
Member Fee
|
Governance
Member Fee
|
|||||||||||||||||||||
| Reinaldo Diaz | $ | 15,875 | $ | 9,000 | $ | 2,000 | $ | 2,000 | $ | 1,000 | $ | 1,875 | $ | - | ||||||||||||||
| Patrick Enright | 18,700 | 9,000 | 2,000 | 4,500 | 3,200 | - | - | |||||||||||||||||||||
| George Lasexkay | 18,625 | 9,000 | 2,000 | 3,000 | 2,000 | 2,625 | - | |||||||||||||||||||||
| Mark McDade | 5,125 | 3,000 | - | 1,000 | 500 | 625 | - | |||||||||||||||||||||
| Alan Mendelson | 4,500 | 3,000 | 1,000 | - | - | - | 500 | |||||||||||||||||||||
| Dennis Purcell | 12,125 | 9,000 | 2,000 | - | - | - | 1,125 | |||||||||||||||||||||
| John Schroeder | 12,125 | 9,000 | 2,000 | 1,125 | - | - | - | |||||||||||||||||||||
| Total | $ | 87,075 | $ | 51,000 | $ | 11,000 | $ | 11,625 | $ | 6,700 | $ | 5,125 | $ | 1,625 | ||||||||||||||
51
Compliance
with Section 16(a) of the Exchange Act
Section 16(a) of
the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) requires
that our directors, executive officers and persons who own more than ten percent
of a registered class of our equity securities, file reports of ownership and
changes in ownership (Forms 3, 4 and 5) with the Securities and Exchange
Commission. Our directors, executive officers and, beneficial owners of more
than ten percent of our common stock are required to furnish us with copies
of
all of these forms, which they file.
Based
solely upon our review of these reports, any amendments thereto or written
representations from certain reporting persons, we believe that during the
fiscal year ended June 30, 2007, all filing requirements applicable to
our directors, executive officers, beneficial owners of more than ten percent
of
our common stock and other persons subject to Section 16(a) of the
Exchange Act were met, except Tracy Taylor and C. Lowell Parsons did not timely
file a Form 3 upon their appointment as directors.
Code
of Business Conduct and Ethics
The
Board
of Directors has adopted a Code of Business Conduct and Ethics that applies
to
all our directors, officers and employees, including our Chief Executive
Officer, who is our principal executive officer, our Vice President of Finance
and Administration, who is our principal financial officer and principal
accounting officer. Our Code of Business Conduct and Ethics is posted on our
website www.urigen.com. We will also provide a copy of our Code of
Business Conduct and Ethics to any person without charge upon request made
in
writing to the Company, Attention: Martin Shmagin, Chief Financial Officer,
875
Mahler Road, Suite 235, Burlingame, California 94010. We intend to disclose
any
amendment to, or a waiver from, a provision of our Code of Business Conduct
and
Ethics that applies to its principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions and that relates to any element of its Code of Business
Conduct and Ethics by posting such information on its website
www.urigen.com.
52
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
The
following table shows for the fiscal years ended June 30, 2007, 2006 and
2005, compensation awarded or paid to, or earned by, the Company’s Chief
Executive Officer and its executive officers, other than the Chief Executive
Officer, whose total annual salary and bonus exceeded $100,000 for the fiscal
year ended June 30, 2007, referred to as our named executive
officers:
|
Annual Compensation
|
Long-Term Compensation
|
||||||||||||||||||||||||||||
|
Name and Principal Position
|
Year
|
Salary
|
Bonus(1)
|
Other
Annual
Compensation(2)
|
Securities
Underlying
Options/SARs
|
Restricted
Stock
Award(s) $
|
All Other
Compensation
|
||||||||||||||||||||||
|
Benjamin
F. McGraw, III,
|
2007
|
$370,000
|
$176,000
|
—
|
―
|
―
|
$111,329
|
(3)
|
|||||||||||||||||||||
|
Pharm.D.,
President, Chief
|
2006
|
370,000
|
$—
|
—
|
438,000
|
59,464
|
$1,598
|
(4)
|
|||||||||||||||||||||
|
Executive
Officer and Chairman
|
2005
|
370,000
|
177,500
|
—
|
221,000
|
—
|
3,483
|
(5)
|
|||||||||||||||||||||
|
John
J. Reddington, Ph.D., DVM
|
2007
|
$102,041
|
$104,500
|
—
|
―
|
―
|
$325,594
|
(6)
|
|||||||||||||||||||||
|
Chief
Operating Officer
|
2006
|
275,000
|
22,950
|
—
|
257,000
|
29,507
|
1,102
|
(7)
|
|||||||||||||||||||||
|
2005
|
255,000
|
73,498
|
—
|
75,000
|
—
|
47,772
|
(8)
|
||||||||||||||||||||||
|
Joseph
A. Markey
|
2007
|
$92,122
|
$59,000
|
—
|
―
|
―
|
$238,133
|
(9)
|
|||||||||||||||||||||
|
Vice
President of Finance and
|
2006
|
206,000
|
13,875
|
—
|
122,000
|
17,839
|
845
|
(10)
|
|||||||||||||||||||||
|
2005
|
185,000
|
43,750
|
—
|
65,000
|
—
|
856
|
(11)
|
||||||||||||||||||||||
|
(1)
|
Bonuses
reflect payment by the Company to the named executive officer during
the
fiscal year for such officer’s performance in the prior fiscal
year. The company issued to Dr. McGraw a promissory note in the
amount of $176,000 in lieu of accrued bonus compensation. The
note bears interest at the rate of 5.0% per annum and may be prepaid
by
the Company in full or in part at any time without premium or penalty
and
is due and payable in full on December 25,
2007.
|
|
(2)
|
As
permitted by rules promulgated by the Securities and Exchange
Commission, no amounts are shown where the amounts constitute perquisites
and do not exceed the higher of 10% of the sum of the salary and
bonus
column or $50,000.
|
|
(3)
|
Represents
insurance premiums of $3,412 paid by the Company with respect to
group
life insurance for the benefit of Dr. McGraw and $110,917 severance
payment earned in fiscal year ended June 30, 2007, which was paid
in July
2007.
|
|
(4)
|
Represents
insurance premiums of $1,598 paid by the Company with respect to
group
life insurance for the benefit of
Dr. McGraw.
|
|
(5)
|
Represents
insurance premiums of $3,483 paid by the Company with respect to
group
life insurance for the benefit of
Dr. McGraw.
|
|
(6)
|
Represents
(i) severance payment of $291,500 per severance and change of control
agreement. Dr. Reddington’s employement with the Company was terminated on
October 31, 2006; (ii) payment of $33,634 for accrued vacation;
and (iii) insurance premiums of $460 paid by the Company with respect
to
group life insurance for the benefit of
Dr. Reddington.
|
|
(7)
|
Represents
insurance premiums of $1,102 paid by the Company with respect to
group
life insurance for the benefit of Dr. Reddington. Excludes
approximately $59,000 of used lab equipment that the
Company purchased from DiagXotics, Inc. where Dr. Reddington
had served as Chief Executive Officer for over 15 years until July
2005.
|
|
(8)
|
Represents
(i) payment of $46,530 for moving expenses during fiscal year ended
June 30, 2005; and (ii) insurance premiums of $1,242 paid by the
Company with respect to group life insurance for the benefit of
Dr. Reddington.
|
|
(9)
|
Represents
(i) severance payment of $213,200 per severance and change of control
agreement. Mr. Markey’s employement with the Company was terminated on
October 31, 2006; (ii) payment of $24,600 for accrued vacation;
and (iii) insurance premiums of $333 paid by the Company with respect
to
group life insurance for the benefit of Mr.
Markey.
|
|
(10)
|
Represents
insurance premiums of $845 paid by the Company with respect to group
life
insurance for the benefit of
Mr. Markey.
|
|
(11)
|
Represents
insurance premiums of $856 paid by the Company with respect to group
life
insurance for the benefit of
Mr. Markey.
|
53
Stock
Option Grants and Exercises
The
Company grants options to its executive officers under its 1997 Equity Incentive
Plan and its 2001 Nonstatutory Incentive Plan. As of June 30, 2007,
options to purchase a total of 2,347,244 shares were outstanding under the
1997
Equity Incentive Plan and the 2001 Nonstatutory Incentive Plan and options
to
purchase 1,892,551 shares remained available for grant thereunder.
The
Company did not grant any stock options to the named executive officers during
the fiscal year ended June 30, 2007. The following tables show for the
fiscal year ended June 30, 2007, certain information regarding options
exercised by, and held at year end by, the named executive
officers:
|
Name
|
Shares
Acquired
on Exercise
(#)(1)
|
Value
Realized
($)
|
Number of Securities
Underlying
Unexercised
Options at
June 30, 2007
(#) Exercisable/
Unexercisable
|
Value of Unexercised
In-the-Money
Options at
June 30, 2007(2)
($) Exercisable/
Unexercisable
|
|||||||||||||||
|
Benjamin
F. McGraw III, Pharm.D.
|
—
|
—
|
948,198/345,981
|
$0/0
|
|||||||||||||||
|
Joseph
A. Markey
|
—
|
—
|
328,337/0
|
(3)
|
$0/0
|
||||||||||||||
|
John
J. Reddington, Ph.D., DVM
|
—
|
—
|
502,000/0
|
(4)
|
$0/0
|
||||||||||||||
|
(1)
|
None
of the executive officers exercised any options in the last fiscal
year.
|
|
(2)
|
Calculated
on the fair market value of the Company’s common stock on
June 30, 2007, which was $0.16, minus the exercise price of the
options.
|
|
(3)
|
In
accordance with the change of control and severance agreement, all
outstanding stock options held by Mr. Markey became fully vested
and
exercisable on October 31, 2006, the date of the termination of
Mr. Markey’s employment with the
Company.
|
|
(4)
|
In
accordance with the change of control and severance agreement, all
outstanding stock options held by Dr. Reddington became fully vested
and
exercisable on October 31, 2006, the date of the termination of
Dr. Reddington’s employment with the
Company.
|
Change
of Control and Severance Agreements
In
May 2006, the Company entered into Severance and Change of Control
agreements with each of Benjamin F. McGraw III, the President and
Chief Executive Officer of the Company, John J. Reddington, the Chief
Operating Officer of the Company, and Joseph A. Markey, the Vice
President of Finance and Administration of the Company. The term of the each
such agreement is for two years from May 12, 2006, unless extended by
mutual agreement by the Company and such executive officer or unless earlier
terminated, as described below.
Each
agreement provides that, if the Company terminates such executive officer’s
employment during the term for any reason other than for cause, disability
or
death, then the executive officer shall be entitled to, among other things,
the
following: (i) the payment of all earned but unpaid base salary and any
other benefit due through the date of termination, (ii) a lump sum cash
payment in an amount equal to such executive officer’s then current annual base
salary, and (iii) notwithstanding any provision to the contrary in any
equity award agreement or equity compensation plan, all outstanding equity
awards then held by such executive officer shall become fully vested and, if
applicable, exercisable with respect to all shares subject thereto immediately
prior to the date of termination.
54
Each
agreement also provides that, if such executive officer terminates his
employment with the Company for good reason or the Company terminates such
executive officer’s employment for any reason other than for cause during the
period commencing three months prior to and ending 12 months after a change
in
control of the Company, such executive officer shall be entitled to, among
other
things, the following in lieu of the payments described above: (i) the
payment of all earned but unpaid base salary and any other benefit due through
the date of termination, (ii) a lump sum cash payment in an amount equal to
three times such executive officer’s then current base salary, in the case of
the agreement with Dr. McGraw, or two times such executive officer’s then
current base salary, in the case of the agreements with Dr. Reddington and
Mr. Markey, and (iii) notwithstanding any provision to the contrary in
any equity award agreement or equity compensation plan, all outstanding equity
awards then held by such executive officer shall become fully vested and, if
applicable, exercisable with respect to all shares subject thereto immediately
prior to the date of termination. Drs. McGraw and Reddington and Mr.
Markey waived the portions of their agreements giving them more than one year’s
salary on change of control.
Each
agreement further provides that, if such executive officer terminates his
employment with the Company without good reason or the Company terminates such
executive officer’s employment for cause, then such executive officer will
(i) receive his earned but unpaid salary through the date of termination,
(ii) all accrued vacation, expense reimbursements and any other benefits
due through the date of termination and (iii) not be entitled to any other
compensation or benefits from the Company, except as required by law or to
the
extent provided under any agreement(s) relating to any equity
awards.
Each
agreement also provides that, for a period commencing on May 12, 2006
and ending 24 months following the date of any termination, such executive
officer shall not, directly or indirectly, (i) induce, solicit or encourage
any employee of the Company to leave the Company or in any way interfere with
the relationship between the Company and any employee thereof or
(ii) induce, solicit or encourage any customer, supplier, licensee,
licensor, franchisee or other business relation of the Company to cease doing
business with the Company or in any way interfere with such
relationship.
Compensation
Committee Interlocks and Insider Participation
During
the fiscal year ended June 30, 2007, none of the Company’s executive
officers served on the board of directors of any entities whose directors or
officers serve on the Company’s Compensation Committee. No current or former
executive officer or employee of the Company serves on the Compensation
Committee.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER
MATTERS
|
The
following table provides information at to shares of common stock beneficially
owned as of October 1, 2007 by:
|
•
|
each
director;
|
|
•
|
each
officer named in the summary compensation
table;
|
|
•
|
each
person owning of record or known by us, based on information provided
to
us by the persons named below, to own beneficially at least 5% of
our
common stock; and
|
|
•
|
all
directors and executive officers as a
group.
|
Unless
otherwise indicated, the persons named in the table below have sole voting
and
investment power with respect to the number of shares indicated as beneficially
owned by them. Furthermore, unless otherwise indicated, the address of the
beneficial owner is c/o Urigen Pharmaceuticals, Inc. 875 Mahler Road, Suite
235,
Burlingame, CA 94010.
55
|
Name
|
|
Shares
of Common Stock Beneficially Owned
|
|
|
Percentage
|
|
|||||
|
William
J. Garner M.D, President, Chief Executive Officer and
Director
|
|
|
18,476,540
|
|
|
|
27.6
|
%
|
|||
|
Martin
E. Shmagin, Chief Financial Officer and Director
|
|
|
2,914,073
|
|
|
|
4.27
|
%
|
|||
|
Terry
M. Nida, Chief Operating Officer
|
|
|
3,135,049
|
|
|
|
4.59
|
%
|
|||
|
Benjamin
F. McGraw, Pharm.D, Chairman of the Board
|
|
|
*
|
|
|
|
*
|
|
|||
|
Tracy
Taylor, Director
|
|
|
*
|
|
|
|
*
|
|
|||
|
C.
Lowell Parsons, Director
|
|
|
1,802,693
|
|
|
|
2.64
|
%
|
|||
|
George
M. Lasezkay, Pharm.D., J.D., Director
|
|
|
*
|
|
|
|
*
|
|
|||
|
All
officers and directors as a group (6 individuals owning
stock)
|
|
|
26,328,355
|
|
|
|
38.56
|
%
|
|||
*
Less
than 1%
Except
as
otherwise indicated each person has the sole power to vote and dispose of all
shares of common stock listed opposite his name. Each person is
deemed to own beneficially shares of common stock which are issuable upon
exercise or warrants or options or upon conversion of convertible securities
if
they are exercisable or convertible within 60 days of October 1,
2007.
The
following table sets forth
information as of June 30, 2007 with respect to the Company’s
compensation plans under which equity securities of the Company are authorized
for issuance:
|
Plan category
|
Number of securitiesto be
issued upon exercise of
outstanding options,
warrants and rights
|
Weighted-average exercise
price of outstanding
options, warrants and rights
|
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities
reflected in column (a))
|
||||||||||||
|
(a)
|
(b)
|
(c)
|
|||||||||||||
|
Equity
compensation plans approved by security holders(1)
|
2,492,065
|
$5.70
|
1,632,730
|
||||||||||||
|
Equity
compensation plans not approved by security holders(2)
|
77,344
|
$7.48.01
|
612,656
|
||||||||||||
|
Total
|
2,569,409
|
$5.76
|
2,245,386
|
||||||||||||
|
(1)
|
Consists
of the 1997 Equity Incentive Plan and the 1998 Non-Employee Directors’
Stock Option Plan. These equity compensation plans are more fully
described in Note 2 to Consolidated Financial Statements included in
this Annual Report on
Form 10-K.
|
|
(2)
|
In
May 2001, the Board of Directors adopted the 2001 Nonstatutory
Incentive Plan covering 100,000 shares of common stock of the Company.
An
additional 590,000 shares were added to the plan as approved by the
Board
of Directors in May 2003, when the plan was amended and restated. The
2001 Plan provides for grants of nonstatutory stock options, stock
bonuses, rights to purchase restricted stock, or a combination of
the
foregoing, referred to as stock awards, to employees and consultants
of
the Company who are not officers and directors. The exercise price
of
options granted under the 2001 Plan is determined by the Board of
Directors but cannot be less than 100% of the fair market value of
the
common stock on the date of the grant. Options under the 2001 Plan
generally vest 25% one year after the date of grant and on a pro
rata
basis over the following 36 months and expire ten years after the
date of grant or 90 days after termination of employment. Stock
awards granted under the plan cannot be repriced without the prior
approval of the Company’s stockholders. Upon a change in control of the
Company, the surviving corporation or acquiring corporation is required
to
assume any stock awards outstanding under the 2001 Plan or substitute
similar stock awards for any stock awards outstanding. If any surviving
or
acquiring corporation refuses to assume such Stock Awards or substitute
similar stock awards, then such stock awards shall be terminated
if not
exercised prior to the change of control. Upon a change in control
not
approved by the Board of Directors, each outstanding stock award
shall
become fully vested immediately prior to the consummation of such
change
in control. As of June 30, 2007, options for 77,344 shares had been
granted under this plan.
|
56
The
foregoing summary is qualified in its entirety by reference to the full text
of
the 2001 Plan. the Company will provide, without charge, to each person to
whom
this proxy statement is delivered, upon request of such person and by first
class mail within one business day of receipt of such request, a copy of the
2001 Plan. Any such request should be directed as follows: Investor Relations,
Urigen Pharmaceuticals, Inc., 875 Mahler Road, Burlingame, California
94010; telephone number: (650) 259-0239.
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
For
the
fiscal year ended June 30, 2007, the Company paid an aggregate of
approximately $229,000 to the law firm of Latham & Watkins LLP for the
provision of legal services during that period. Mr. Mendelson, a former
director of the Company, is a partner of Latham & Watkins
LLP.
During
the fiscal year ended June 30, 2007, the spouse of
Joseph A. Markey provided services to the Company for which she was
paid approximately $74,000.
The
Company has entered into indemnity agreements with each of its executive
officers and directors which provide, among other things, that the Company
will
indemnify such officer or director, under the circumstances and to the extent
provided for therein, for expenses, damages, judgments, fines and settlements
he
may be required to pay in actions or proceedings, which he is or may be made
a
party by reason of his position as a director, officer or other agent of the
Company, and otherwise to the full extent permitted under Delaware law and
the
Company’s Bylaws.
We
pay a
monthly fee of $2,683 to EGB Advisors, LLC. EGB Advisors, LLC is owned
solely by William J. Garner, President and CEO of the Company.
Mr. Garner owns 18,476,540 shares of common stock. The fees are for rent,
telephone and other office services which are based on estimated fair market
value. Mr. Garner also received payment for services provided as a
consultant to the Company. As of June 30, 2007, Mr. Garner and EGB
Advisors, LLC were owed $14,610, collectively.
On
November 17, 2006, Urigen, N.A. issued an unsecured promissory note to
C. Lowell Parsons, a director of the Company, in the amount of
$200,000. Under the terms of the note, the Company is to pay interest
at a rate per annum computed on the basis of a 360-day year equal to 12% simple
interest. The foregoing amount is due and payable on the earlier of (i)
forty-five (45) days after consummation of the Merger (as defined in the
Agreement and Plan of Merger, dated as of October 5, 2006, between the Company
and Valentis, Inc., or (ii) two (2) calendar years from the note issuance date
(in either case, the “Due Date”). Also, the Company agreed to issue
1,000 shares of Series B Preferred Stock, par value $0.00001 per
share.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Fees
paid
or accrued by the Company for services provided by the Company’s auditor, Burr,
Pilger & Mayer LLP, for fiscal year 2007 are as follows:
57
Audit
Fees: The aggregate fees billed for professional services
rendered for the audit of the Company's annual financial statements for the
fiscal year ended June 30, 2007 were $120,000.
We
have
not paid any audit related or tax fees to Burr, Pilger & Mayer LLP, for
fiscal year 2007.
Fees
paid
or accrued by the Company, Inc. for services provided by the Company’s
former auditor, Ernst & Young LLP, for fiscal year 2006 are as
follows:
Audit
Fees: The aggregate fees billed for professional services
rendered for the audit of the Company annual financial statements for the fiscal
year ended June 30, 2006 and the reviews of the financial statements
included in the Company’s Forms 10-Q, issuance of consents and other services in
connection with statutory and regulatory filings and accounting consultations
in
connection with or arising as a result of the audits and quarterly review of
the
financial statements for that fiscal year were $336,130.
Audit-Related
Fees: The aggregate fees billed for audit-related
services were $27,000 for the fiscal year ended June 30, 2006.
Audit-related fees consist of fees for services rendered for assurance and
related services that are reasonably related to the performance of the audit
or
review of the Company’s financial statements and are not reported under “Audit
Fees.” All of the audit-related fees in fiscal 2006 relate to services rendered
for the audit of the Company’s employee benefit plans.
Tax
Fees: The aggregate fees billed for services for tax compliance
was $28,100 for the fiscal year ended June 30, 2006.
During
Fiscal 2006, all services provided by Ernst & Young were pre-approved
by the Audit Committee.
Pursuant
to our Audit Committee Charter, before the independent auditor is engaged by
Valentis to render audit or non-audit services, the Audit Committee pre-approves
the engagement. Audit Committee pre-approval of audit and non-audit services
is
not required if the engagement for the services is entered into pursuant to
pre-approval policies and procedures established by the Audit Committee
regarding the Company’s engagement of the independent auditor. The Audit
Committee has established a pre-approved policy and procedure where pre-approval
of specific audit and non-audit services that equal or are not expected to
exceed $30,000 is not required so long as the Audit Committee is informed of
each service provided by the independent auditor and such policies and
procedures do not result in the delegation of the Audit Committee’s
responsibilities under the Securities Exchange Act of 1934, as amended. Audit
and non-audit services expected to exceed $30,000 require pre-approval of such
audit and non-audit services by the Audit Committee. The Audit Committee may
delegate to one or more designated members of the Audit Committee the authority
to grant pre-approvals, provided such approvals are presented to the Audit
Committee at a subsequent meeting. Audit Committee pre-approval of non-audit
services other than review and attest services also is not required if such
services fall within available exceptions established by the Securities and
Exchange Commission.
|
ITEM15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
(a)(1)
Index to Financial Statements
The
Financial Statements and report of independent auditors required by this item
are submitted in a separate section beginning on page 62 of this
Report.
|
|
Page No.
|
|||
|
Report
of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting
Firm
|
65
|
|||
|
Report
of Ernst & Young
LLP, Independent Registered Public Accounting Firm
|
|
|
66
|
|
|
Consolidated
Balance
Sheets
|
|
|
67
|
|
|
Consolidated
Statements of
Operations
|
|
|
68
|
|
|
Consolidated
Statements of
Stockholders’ Equity
|
|
|
69
|
|
|
Consolidated
Statements of Cash
Flows
|
|
|
70
|
|
|
Notes
to Consolidated Financial
Statements
|
|
|
71
|
|
58
(a)(2) No
schedules have been filed, as they were not required or are inapplicable and
therefore have been omitted.
(a)(3) Exhibits
|
Exhibit
Footnote
|
|
Exhibit
Number
|
|
Description
of Document
|
||
|
|
(10
|
)
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of the
Registrant.
|
|
|
(1
|
)
|
|
3.2
|
|
Bylaws
of the Registrant.
|
|
|
(3
|
)
|
|
3.3
|
|
Certificate
of Designations of Series A Convertible Redeemable Preferred
Stock.
|
|
|
(4
|
)
|
|
3.4
|
|
Certificate
of Amendment to the Bylaws of the Registrant.
|
|
3.5
|
|
Certificate
of Merger of Valentis, Inc. and Urigen Pharmaceuticals, Inc. filed
July
19, 2007**
|
||||
|
(26
|
)
|
3.6
|
Amended
and Restated Certificate of Designation filed July 31,
2007
|
|||
|
|
|
|
|
4.1
|
|
Reference
is made to Exhibits 3.1 and 3.2.
|
|
|
(1
|
)
|
|
4.2
|
|
Specimen
stock certificate.
|
|
|
(1
|
)
|
|
4.3
|
|
Amended
and Restated Investor Rights Agreement, dated as of May 23, 1997,
between the Registrant and the investors named therein.
|
|
|
(3
|
)
|
|
4.4
|
|
Form of
Common Stock Purchase Warrant, Class A.
|
|
|
(3
|
)
|
|
4.5
|
|
Form of
Common Stock Purchase Warrant, Class B.
|
|
|
(10
|
)
|
|
4.6
|
|
Stock
Issuance and Restriction Agreement between the Registrant and The
Woodlands, dated September 4, 2003.
|
|
|
(4
|
)
|
|
10.1
|
|
Amended
and Restated 1997 Equity Incentive Plan.
|
|
|
(1
|
)
|
|
10.2
|
|
Form of
Incentive Stock Option Grant.
|
|
|
(1
|
)
|
|
10.3
|
|
Form of
Non-Incentive Stock Option.
|
|
|
(1
|
)
|
|
10.4
|
|
1997
Employee Stock Purchase Plan.
|
|
|
(1
|
)
|
|
10.5
|
|
Form of
Indemnification Agreement entered into between the Registrant and
its
directors and executive officers.
|
|
|
(1
|
)
|
|
10.6
|
|
Letter
Agreement between the Registrant and Benjamin F. McGraw III,
Pharm.D.
|
|
|
(1
|
)
|
|
10.7
|
|
Lease
Agreement between the Registrant and Provident Life and Accident
Insurance
Company (Provident), dated December 21, 1993.
|
|
|
(1
|
)
|
|
10.8
|
|
Lease
Agreement between the Registrant and SFO Associates LLC (SFO Associates),
dated March 18, 1997.
|
|
|
(14
|
)
|
|
10.9
|
|
Fourth
Amendment to Lease between the Registrant and ARE-819/863 Mitten
Road, LLC
(successor in interest to Provident and SFO Associates), dated
March 31, 2004.
|
|
(2
|
)*
|
|
10.10
|
|
First
Amendment and Restatement of License Agreement between Registrant
and
Baylor College of Medicine dated
March 7, 1994.
|
|
59
|
(2
|
)*
|
|
10.11
|
|
First
Amendment and Restatement of License Agreement—Woo between Registrant and
Baylor College of Medicine dated March 7, 1994.
|
|
|
|
(2
|
)*
|
|
10.12
|
|
First
Amendment and Restatement of License Agreement—GeneSwitch® between
Registrant and Baylor College of Medicine dated March 7,
1994.
|
|
|
(3
|
)
|
|
10.13
|
|
Form of
Subscription Agreement between the Registrant and each of the selling
security holders, dated as of November 20, 2000.
|
|
|
(6
|
)
|
|
10.14
|
|
Amended
and Restated 1998 Non-Employee Directors’ Stock Option
Plan.
|
|
|
(4
|
)
|
|
10.15
|
|
Amended
and Restated 2001 Nonstatutory Incentive Plan.
|
|
|
(5
|
)
|
|
10.16
|
|
Form of
Amendment, Consent and Waiver Regarding the Subscription Agreement
and
Certificate of Designations for the Series A Preferred Stock by and
among the Company and each holder of the Company’s Series A
Convertible Redeemable Preferred Stock.
|
|
|
(7
|
)*
|
|
10.17
|
|
Form of
License and Option Agreement, effective as of December 19, 2002, by
and between the Company and Schering AG.
|
|
|
(10
|
)
|
|
10.18
|
|
Lease
Termination Agreement between the Company and The Woodlands, dated
September 4, 2003.
|
|
|
(6
|
)
|
|
10.19
|
|
Amendment
to the Amended and Restated 1997 Equity Incentive Plan.
|
|
|
(6
|
)
|
|
10.20
|
|
2003
Employee Stock Purchase Plan.
|
|
|
(8
|
)
|
|
10.21
|
|
Securities
Purchase Agreement, dated as of December 2, 2003, by and among
Valentis, Inc. and the purchasers identified on the signature
pages thereto.
|
|
|
(8
|
)
|
|
10.22
|
|
Form of
Warrant to purchase Common Stock.
|
|
|
(8
|
)
|
|
10.23
|
|
Registration
Rights Agreement, dated as of December 2, 2003, by and among
Valentis, Inc. and the Purchasers signatory
thereto.
|
|
|
(9
|
)
|
|
10.24
|
|
Securities
Purchase Agreement, dated as of June 7, 2004, by and among
Valentis, Inc. and the Purchasers signatory
thereto.
|
|
|
(9
|
)
|
|
10.25
|
|
Form of
Warrant to purchase Common Stock.
|
|
|
(9
|
)
|
|
10.26
|
|
Registration
Rights Agreement, made and entered into as of June 7, 2004, by
and among Valentis, Inc. and the Purchasers signatory
thereto.
|
|
|
(11
|
)
|
|
10.27
|
|
Securities
Purchase Agreement, dated as of June 24, 2005, by and among
Valentis, Inc. and the Purchasers signatory
thereto.
|
|
|
(11
|
)
|
|
10.28
|
|
Form of
Warrant to purchase Common Stock.
|
|
|
(11
|
)
|
|
10.29
|
|
Registration
Rights Agreement, made and entered into as of June 24, 2005, by
and among Valentis, Inc. and the Purchasers signatory
thereto.
|
|
|
(12
|
)
|
|
10.30
|
|
Securities
Purchase Agreement, dated March 21, 2006, by and among
Valentis, Inc. and the Purchasers signatory
thereto.
|
|
|
(12
|
)
|
|
10.31
|
|
Form of
Warrant to purchase Common Stock.
|
|
|
(12
|
)
|
|
10.32
|
|
Registration
Rights Agreement, dated March 21, 2006, by and among
Valentis, Inc. and the Purchasers signatory
thereto.
|
|
|
(13
|
)
|
|
10.33
|
|
Severance
and Change of Control Agreement, dated May 12, 2006, between
Valentis, Inc. and Benjamin F. McGraw III.
|
|
|
(13
|
)
|
|
10.34
|
|
Severance
and Change of Control Agreement, dated May 12, 2006, between
Valentis, Inc. and John J. Reddington.
|
|
|
(13
|
)
|
|
10.35
|
|
Severance
and Change of Control Agreement, dated May 12, 2006, between
Valentis, Inc. and Joseph A. Markey.
|
|
(15
|
)
|
Agreement
and Plan of Merger with Urigen, N.A and Valentis Holdings, Inc. dated
as
of October 5, 2006
|
||||
|
(16
|
)
|
Technology
Transfer Agreement between Valentis, Inc. and Genetronics, Inc. dated
as
of October 16, 2006
|
||||
|
(17
|
)
|
Asset
Transfer Agreement, dated as of October 26, 2006, by and between
Valentis,
Inc. and Biolitec,
Inc.
|
60
|
(17
|
)
|
Asset
Purchase Agreement, dated as of October 27, 2006, by and between
Valentis,
Inc. and Juvaris Biotherapeutics, Inc.
|
||||
|
(17
|
)
|
Asset
Transfer Agreement, dated as of October 27, 2006 by and between Valentis,
Inc. and Juvaris Biotherapeutics, Inc.
|
||||
|
(17
|
)
|
License
Agreement, dated as of October 27, 2006, by and between Valentis,
Inc. and
Juvaris Biotherapeutics, Inc.
|
||||
|
(18
|
)
|
Technology
Transfer Agrement, Inc. dated as of October 24, 2006 by and between
Valentis, Inc. and Vical Incorporated
|
||||
|
(18
|
)
|
License
Agreement dated as of October 23, 2006, by and between Valentis,
Inc. and
Vical Incorporated
|
||||
|
(19
|
)
|
Agreement
for termination of Lease and Voluntary Surrender of Premises, dated
as of
October 30, 2006, by and between Valentis, Inc. and ARE 819/863 Mitten
Road, LLC
|
||||
|
(20
|
)
|
Non-Exclusive
License Agreement dated as of January 8, 2007 by and between Valenits,
Inc. and Althea Technologies, Inc.
|
||||
|
(21
|
)
|
Asset
Purchase Agreement, effective as of January 26, 2007, as amended
by and
between Valentis, Inc. and Medarex, Inc.
|
||||
|
(22
|
)
|
Waiver,
Consent and Amendment to Agreement and Plan of Merger dated as of
February
1, 2007 by and among Valentis, Inc, Valentis Holdings, Inc. and Urigen,
N.A, Inc.
|
||||
|
(23
|
)
|
Second
Amendment to Agreement and Pan of Merger, dated as of March 28, 2007
by
and among Valentis, Inc, Valentis Holdings, Inc. and Urigen, N.A,
Inc.
|
||||
|
(24
|
)
|
Exclusive
License Agreement, dated as of April 12, 2007, by and between Valentis,
Inc. and Acacia Patent Acquisition Corporation
|
||||
|
(25
|
)
|
Third
Amendment to Agreement and Plan of Merger, dated as of May 14, 2007
by and
among Valentis, Inc, Valentis Holdings, Inc. and Urigen, N.A,
Inc.
|
||||
|
(26
|
)
|
Series
B Convertible Preferred Stock Purchase Agreement dated as of July
31, 2007
between Urigen Pharmaceuticals, Inc. and Platinum-Montaur Life Sciences,
LLC
|
||||
|
(26
|
)
|
Registration
Rights Agreement dated as of August 1, 2007 between Urigen
Pharmaceuticals, Inc. and Platinum-Montaur Life Sciences,
LLC
|
||||
|
(26
|
)
|
Form
of Warrant issued to Platinum-Montaur Life Sciences,
LLC
|
||||
|
(27
|
)
|
Amendment
to Agreement between Valentis, Inc., Acacia Patent Acquisition
Corporation and Urigen Pharmaceuticals, Inc.
|
||||
|
|
|
21.1
|
|
Subsidiaries
of the Registrant
|
||
|
|
|
23.1
|
|
Consent
of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting
Firm.**
|
||
|
23.2
|
Consent
of Ernst & Young, LLP, Independent Registered Public Accounting
Firm.**
|
|||||
|
|
|
24.1
|
|
Power
of Attorney (included on signature page herewith).
|
||
|
|
31.1
|
|
Certification
of Principal Executive Officer
Section 302.**
|
|||
61
|
|
31.2
|
|
Certification
of Principal Financial Officer Section 302.**
|
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer Section 906.**
|
|
|
|
32.2
|
|
Certification
of Principal Financial Officer
Section 906.**
|
|
(1)
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form S-1
(No. 333-32593) or amendments thereto and incorporated herein by
reference.
|
|
(2)
|
Filed
as an exhibit to GeneMedicine’s Registration Statement on Form S-1
(No. 33-77126) or amendments thereto and incorporated herein by
reference.
|
|
(3)
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form S-3
(No. 333-54066) filed with the SEC on January 19, 2001 and
incorporated herein by reference.
|
|
(4)
|
Filed
as an exhibit to Registrant’s Annual Report on Form 10-K
(No. 0-22987) for fiscal year ended June 30, 2002 and
incorporated herein by reference.
|
|
(5)
|
Incorporated
by reference to the Company’s Definitive Proxy Statement on Form DEF
14A (SEC File No. 000-22987), filed with the Securities and
Exchange Commission on December 12,
2002.
|
|
(6)
|
Incorporated
by reference to the Company’s Definitive Proxy Statement on Form DEF
14A (SEC File No. 000-22987), filed with the Securities and
Exchange Commission on May 5,
2003.
|
|
(7)
|
Filed
as Exhibit 10.1 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended December 31, 2002 and
incorporated herein by reference.
|
|
(8)
|
Filed
as an exhibit to the Report on Form 8-K, filed with the Securities
and Exchange Commission on December 31, 2003 and incorporated herein
by reference.
|
|
(9)
|
Filed
as an exhibit to the Report on Form 8-K, filed with the Securities
and Exchange Commission on June 14, 2004 and incorporated herein by
reference.
|
|
(10)
|
Filed
as an exhibit to Registrant’s Annual Report on Form 10-K
(No. 000-22987) for fiscal year ended June 30, 2003 and
incorporated herein by reference.
|
|
(11)
|
Filed
as an exhibit to the Report on Form 8-K, filed with the Securities
and Exchange Commission on June 27, 2005 and incorporated herein by
reference.
|
|
(12)
|
Filed
as an exhibit to the Report on Form 8-K, filed with the Securities
and Exchange Commission on March 22, 2006 and incorporated herein by
reference.
|
|
(13)
|
Filed
as an exhibit to the Report on Form 8-K, filed with the Securities
and Exchange Commission on May 12, 2006 and incorporated herein by
reference.
|
|
(14)
|
Filed
as an exhibit to the Annual Report on Form 10-K, filed with the Securities
and Exchange Commission September 26, 2005 and incorporated herein
by
reference.
|
|
(15)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on September 29, 2006 and incorporated herein
by
reference.
|
|
(16)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on October 16, 2006 and incorporated herein by
reference.
|
|
(17)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on October 26, 2006 and incorporated herein by
reference.
|
|
(18)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on November 2, 2006 and incorporated herein by
reference.
|
62
|
(19)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on November 22, 2006 and incorporated herein
by
reference.
|
|
(20)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on January 11, 2007 and incorporated herein by
reference.
|
|
(21)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on February 1, 2007 and incorporated herein by
reference.
|
|
(22)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on February 7, 2007 and incorporated herein by
reference.
|
|
(23)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on March 28, 2007 and incorporated herein by
reference.
|
|
(24)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on April 18, 2007 and incorporated herein by
reference.
|
|
(25)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on May 15, 2007 and incorporated herein by
reference.
|
|
(26)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on August 6, 2007 and incorporated herein by
reference.
|
|
(27)
|
Filed
as an exhibit to the Report on Form 8-K filed with the Securities
and
Exchange Commission on August 10, 2007 and incorporated herein by
reference.
|
|
*
|
Confidential
treatment granted pursuant to a Confidential Treatment Order for
portions
of this document.
|
|
**
|
Filed
herewith
|
|
†
|
Confidential
treatment has been requested with respect to certain portions of
this
Exhibit. The omitted portions have been separately filed with the
Securities and Exchange Commission.
|
63
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on
October 5, 2007.
|
/s/Martin
Shmagin
|
/s/
William J. Garner, MD
|
|||
|
MARTIN
E. SHMAGIN
|
WILLIAM
J. GARNER, MD
|
|||
|
Chief
Financial Officer
|
President
and Chief Executive Officer
|
KNOW
ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints William J. Garner, MD and Martin Shmagin, and each
or
any one of them, his true and lawful attorney-in-fact and agent, with full
power
of substitution and resubstitution, for him and in his name, place and stead,
in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Annual Report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitutes or substitute, may 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/
William J. Garner
|
|
President
and Chief Executive Officer
|
|
October 5,
2007
|
||||||
|
WILLIAM
J. GARNER, MD
|
|
(Principal
Executive Officer)
|
|
|
||||||
|
/s/
Martin E. Shmagin
|
|
Chief
Financial Officer and Director
|
|
October 5,
2007
|
||||||
|
MARTIN
E. SHMAGIN
|
|
(Principal
Financial and Accounting Officer)
|
|
|
||||||
|
/s/
George M. Lasezkay
|
|
Chairman
of the Board of Directors
|
|
October 5,
2007
|
||||||
|
GEORGE
M. LASEZKAY
|
|
Director
|
|
|
||||||
|
/s/
C. Lowell Parsons
|
|
Director
|
|
October 5,
2007
|
||||||
|
C.
LOWELL PARSONS
|
|
|
|
|
||||||
64
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders of
Urigen
Pharmaceuticals, Inc. (formerly Valentis, Inc.)
We
have
audited the accompanying consolidated balance sheet of Urigen Pharmaceuticals,
Inc. (formerly Valentis, Inc.) and its subsidiary (the “Company”) as of June 30,
2007 and the related consolidated statements of operations, stockholders’
equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of
the
Company’s 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 on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Urigen
Pharmaceuticals, Inc. (formerly Valentis, Inc.) and its subsidiary as of
June 30, 2007, and the results of their operations and their cash flows for
the
year then ended in conformity with accounting principles generally accepted
in
the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1
to the consolidated financial statements, the Company’s recurring losses from
operations, negative cash flow from operations and accumulated deficit raise
substantial doubt about its ability to continue as a going
concern. Management’s plans as to these matters are also described in
Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As
discussed in Note 16 to the consolidated financial statements, effective July
13, 2007, the Company completed a reverse merger with Urigen N.A.., Inc. a
private, development stage company and changed its name to Urigen
Pharmaceuticals, Inc. on July 30, 2007.
|
October
2, 2007
|
By:
|
/s/ Burr, Pilger & Mayer LLP | |
65
PUBLIC
ACCOUNTING FIRM
The
Board
of Directors and Stockholders
Urigen
Pharmaceuticals, Inc. (formerly Valentis, Inc.)
We
have
audited the accompanying consolidated balance sheet of Urigen Pharmaceuticals,
Inc. (formerly Valentis, Inc.) as of June 30, 2006, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for each of the two years in the period ended June 30, 2006.
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. We were not engaged to perform
an
audit of the Company’s internal control over financial reporting. Our audits
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 on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Urigen
Pharmaceuticals, Inc. (formerly Valentis, Inc.) as of
June 30, 2006, and the consolidated results of its operations and its
cash flows for each of the two years in the period ended
June 30, 2006, in conformity with U.S. generally accepted accounting
principles.
The
accompanying consolidated financial statements have been prepared assuming
that
Urigen Pharmaceuticals, Inc. (formerly Valentis, Inc.) will continue as a
going concern. As more fully described in Note 1, the Company has incurred
losses since inception, including a net loss of $15.3 million for the year
ended June 30, 2006 and its accumulated deficit was $240 million at
June 30, 2006. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans as 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.
As
discussed in Note 1 to the consolidated financial statements, in fiscal year
2006, Urigen Pharmaceuticals, Inc. (formerly Valentis, Inc.) changed its
method of accounting for stock-based compensation in accordance with guidance
provided in Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment”.
|
September
27, 2006
|
By:
|
/s/ Ernst & Young LLP | |
66
URIGEN
PHARMACEUTICALS, INC. (formerly Valentis,
Inc.)
CONSOLIDATED
BALANCE SHEETS
|
June 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ |
478
|
$ |
3,598
|
||||
|
Short-term
investments
|
―
|
750
|
||||||
|
Interest
and other receivables
|
―
|
87
|
||||||
|
Prepaid
expenses and other current assets
|
217
|
280
|
||||||
|
Total
current assets
|
695
|
4,715
|
||||||
|
Property
and equipment, net
|
5
|
37
|
||||||
|
Goodwill
|
409
|
409
|
||||||
|
Other
assets
|
―
|
97
|
||||||
|
Total
assets
|
$ |
1,109
|
$ |
5,258
|
||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ |
―
|
$ |
91
|
||||
|
Accrued
compensation
|
174
|
889
|
||||||
|
Accrued
clinical trial costs
|
12
|
730
|
||||||
|
Other
accrued liabilities
|
312
|
705
|
||||||
|
Note
payable to related party
|
176
|
―
|
||||||
|
Total
current liabilities
|
674
|
2,415
|
||||||
|
Commitments
and contingencies (Note 14)
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock, $.001 par value, 190,000,000 shares authorized; 17,062,856
and
17,087,737 shares issued and outstanding at June 30, 2007 and 2006,
respectively
|
17
|
17
|
||||||
|
Additional
paid-in capital
|
244,818
|
243,493
|
||||||
|
Accumulated
other comprehensive loss
|
(693 | ) | (693 | ) | ||||
|
Accumulated
deficit
|
(243,707 | ) | (239,974 | ) | ||||
|
Total
stockholders’ equity
|
435
|
2,843
|
||||||
|
Total
liabilities and stockholders’ equity
|
$ |
1,109
|
$ |
5,258
|
||||
See
notes
to accompanying financial statements
67
|
Year ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
License
and milestone revenue
|
$ |
571
|
$ |
627
|
$ |
1,640
|
||||||
|
Contract
research revenue
|
―
|
100
|
476
|
|||||||||
|
Other
revenue
|
—
|
—
|
61
|
|||||||||
|
Total
revenue
|
571
|
727
|
2,177
|
|||||||||
|
Costs
and operating expenses:
|
||||||||||||
|
Cost
of contract research revenue
|
―
|
93
|
521
|
|||||||||
|
Research
and development
|
872
|
10,847
|
8,823
|
|||||||||
|
General
and administrative
|
4,783
|
5,368
|
4,109
|
|||||||||
|
Restructuring
charges
|
1,029
|
―
|
―
|
|||||||||
|
Total
operating expenses
|
6,684
|
16,308
|
13,453
|
|||||||||
|
Loss
from operations
|
(6,113 | ) | (15,581 | ) | (11,276 | ) | ||||||
|
Interest
income
|
39
|
279
|
285
|
|||||||||
|
Other
income and expense, net
|
2,341
|
(35 | ) | (92 | ) | |||||||
|
Net
loss
|
$ | (3,733 | ) | $ | (15,337 | ) | $ | (11,083 | ) | |||
|
Basic
and diluted net loss per share
|
$ | (0.22 | ) | $ | (0.99 | ) | $ | (0.85 | ) | |||
|
Shares
used in computing basic and diluted net loss per common
share
|
17,052
|
15,453
|
13,028
|
|||||||||
See
notes
to accompanying financial statements
68
URIGEN
PHARMACEUTICALS, INC. (formerly Valentis,
Inc.)
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Other
|
Total
|
||||||||||||||||||||||
|
Common Stock
|
Paid-In
|
Comprehensive
|
Accumulated
|
Stockholders’
|
||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Loss
|
Deficit
|
Equity
|
|||||||||||||||||||
|
Balances
at June 30, 2004
|
12,996,607
|
$ |
13
|
$ |
232,137
|
$ | (706 | ) | $ | (213,554 | ) | $ |
17,890
|
|||||||||||
|
Issuance
of common stock pursuant to Employee Stock Purchase Plan
and 401(k) Plan
|
34,981
|
—
|
80
|
—
|
—
|
80
|
||||||||||||||||||
|
Stock
options and warrants granted to non-employees for services
rendered
|
—
|
—
|
516
|
—
|
—
|
516
|
||||||||||||||||||
|
Stock
issued to non-employees for services rendered
|
18,796
|
—
|
52
|
—
|
—
|
52
|
||||||||||||||||||
|
Disgorgement
of Short-Swing Profits
|
—
|
—
|
29
|
—
|
—
|
29
|
||||||||||||||||||
|
Exercise
of warrants
|
102,155
|
—
|
198
|
—
|
—
|
198
|
||||||||||||||||||
|
Private
placement of common stock and warrants, net of issuance costs of
$324
|
1,680,840
|
2
|
3,877
|
—
|
—
|
3,879
|
||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
(11,083 | ) | (11,083 | ) | ||||||||||||||||
|
Net
unrealized gain on available for sale securities
|
—
|
—
|
—
|
8
|
—
|
8
|
||||||||||||||||||
|
Total
comprehensive loss
|
(11,075 | ) | ||||||||||||||||||||||
|
Balances
at June 30, 2005
|
14,833,379
|
15
|
236,889
|
(698 | ) | (224,637 | ) |
11,569
|
||||||||||||||||
|
Issuance
of common stock pursuant to Stock Plans and 401(k) Plan,
net
|
154,358
|
—
|
85
|
—
|
—
|
85
|
||||||||||||||||||
|
Stock-based
compensation expenses—non-employees
|
—
|
—
|
63
|
—
|
—
|
63
|
||||||||||||||||||
|
Stock-based
compensation expenses—employees
|
—
|
—
|
1,447
|
—
|
—
|
1,447
|
||||||||||||||||||
|
Private
placement of common stock and warrants, net of issuance costs of
$239
|
2,100,000
|
2
|
5,009
|
—
|
—
|
5,011
|
||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
(15,337 | ) | (15,337 | ) | ||||||||||||||||
|
Net
unrealized gain on available for sale securities
|
—
|
—
|
—
|
5
|
—
|
5
|
||||||||||||||||||
|
Total
comprehensive loss
|
(15,332 | ) | ||||||||||||||||||||||
|
Balances
at June 30, 2006
|
17,087,737
|
17
|
243,493
|
(693 | ) | (239,974 | ) |
2,843
|
||||||||||||||||
|
Stock-based
compensation expenses—non-employees
|
—
|
—
|
1
|
—
|
—
|
1
|
||||||||||||||||||
|
Stock-based
compensation expenses—employees
|
—
|
—
|
1,335
|
—
|
—
|
1,335
|
||||||||||||||||||
|
Repurchases
|
(24,881 | ) |
—
|
(11 | ) |
—
|
—
|
(11 | ) | |||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
(3,733 | ) | (3,733 | ) | ||||||||||||||||
|
Total
comprehensive loss
|
(3,733 | ) | ||||||||||||||||||||||
|
Balances
at June 30, 2007
|
17,062,856
|
$ |
17
|
$ |
244,818
|
$ | (693 | ) | $ | (243,707 | ) | $ |
435
|
|||||||||||
See
notes
to accompanying financial statements
69
|
Year ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (3,733 | ) | $ | (15,337 | ) | $ | (11,083 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operations:
|
||||||||||||
|
Depreciation
|
10
|
35
|
48
|
|||||||||
|
Gain
on disposal of assets
|
(582 | ) |
—
|
—
|
||||||||
|
Stock
options, stock and warrants granted to non-employees for services
rendered
|
1
|
63
|
529
|
|||||||||
|
Employee
stock-based compensation
|
1,335
|
1,447
|
—
|
|||||||||
|
401(k) stock
contribution matching expense
|
―
|
62
|
55
|
|||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Interest
and other receivables
|
87
|
270
|
(167 | ) | ||||||||
|
Prepaid
expenses and other current assets
|
63
|
57
|
(32 | ) | ||||||||
|
Deferred
revenue
|
—
|
—
|
(100 | ) | ||||||||
|
Other
assets
|
97
|
400
|
—
|
|||||||||
|
Accounts
payable
|
(91 | ) | (174 | ) |
58
|
|||||||
|
Accrued
liabilities
|
(1,650 | ) |
6
|
(1,376 | ) | |||||||
|
Net
cash used in operating activities
|
(4,463 | ) | (13,171 | ) | (12,068 | ) | ||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase
of property and equipment
|
―
|
(33 | ) | (8 | ) | |||||||
|
Proceeds
from sale of property and equipment
|
604
|
—
|
—
|
|||||||||
|
Purchases
of available-for-sale investments
|
―
|
(5,522 | ) | (10,474 | ) | |||||||
|
Maturities
of available-for-sale investments
|
750
|
8,425
|
17,768
|
|||||||||
|
Net
cash provided by investing activities
|
1,354
|
2,870
|
7,286
|
|||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from issuance of common stock
|
―
|
5,034
|
4,131
|
|||||||||
|
Common
stock repurchases
|
(11 | ) |
―
|
―
|
||||||||
|
Net
cash provided by (used in) financing activities
|
(11 | ) |
5,034
|
4,131
|
||||||||
|
Net
decrease in cash and cash equivalents
|
(3,120 | ) | (5,267 | ) | (651 | ) | ||||||
|
Cash
and cash equivalents, beginning of year
|
3,598
|
8,865
|
9,516
|
|||||||||
|
Cash
and cash equivalents, end of year
|
$ |
478
|
$ |
3,598
|
$ |
8,865
|
||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Income
taxes and Interest paid
|
$ |
—
|
$ |
—
|
$ |
—
|
||||||
|
Schedule
of non-cash transactions:
|
||||||||||||
|
Pre-paid
expenses recorded for stock issued to a non-employee for services
rendered
|
$ |
—
|
$ |
—
|
$ |
39
|
||||||
|
Conversion
of accrued bonus liability to a note payable
|
$ |
176
|
$ |
—
|
$ |
—
|
||||||
See
notes
to accompanying financial statements
70
June 30, 2007
|
1.
|
ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Organization
and Basis of Presentation
On
October 5, 2006, Valentis, Inc. (“Valentis” or “the Company”) entered into an
Agreement and Plan of Merger, as subsequently amended (the “ Merger Agreement ”)
with Urigen N.A., Inc., a Delaware corporation (“ Urigen N.A.”), and Valentis
Holdings, Inc., our newly formed wholly-owned subsidiary (“Valentis Holdings ”).
Pursuant to the Merger Agreement, on July 13, 2007, Valentis Holdings was merged
with and into Urigen N.A., (“the Merger”) with Urigen N.A. surviving as
Valentis, Inc.’s wholly-owned subsidiary. In connection with the Merger, an
aggregate of 51,226,679 shares of Valentis common stock were issued to the
Urigen N.A. stockholders. On July 30, 2007 Valentis, Inc. changed its
name to Urigen Pharmaceuticals, Inc.
From
and
after the Merger, the business of the combined company is principally conducted
through Urigen N.A. The accompanying consolidated financial
statements reflect the accounts of Valentis, Inc. and its wholly owned
subsidiary PolyMASC Pharmaceuticals plc. (“PolyMASC”). All
significant intercompany transactions have been eliminated.
Valentis
was previously formed as the result of the merger of Megabios Corp. and
GeneMedicine, Inc. in March 1999. Valentis was incorporated in
Delaware. In August 1999, the Company acquired U.K.-based
PolyMASC. The Company is located in Burlingame, California, where its
headquarters and business operations are located.
Valentis
was a biotechnology company that was previously engaged in the development
of
innovative products for peripheral artery disease, or PAD. PAD is due to chronic
inflammation of the blood vessels of the legs leading to the formation of
plaque, which obstructs blood flow.
On
July 11, 2006 Valentis announced negative results for its
Phase IIb clinical trial of VLTS 934 in PAD. Valentis also announced
that it has no plans for further development of the product.
Except
for the quarter ended September 30, 2003, in which the Company
reported net income of approximately $3.4 million resulting principally
from the $6.5 million non-recurring license revenue recognized under the
license and settlement agreement with ALZA Corporation, Valentis has experienced
net losses since its inception through June 30, 2007, and reported a
net loss of $3.7 million for the fiscal year ended June 30, 2007.
The accumulated deficit was $243.7 million at June 30, 2007. At
June 30, 2007, Valentis had $478,000 in cash and cash
equivalents. Management’s plans for future funding of the Company
include raising additional financing (see Note 16) and raising funds through
sale of a current license and entering licensing and distribution agreements
outside the United States.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. 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 matters discussed above.
Foreign
Currency Translation
The
Company translates the assets and liabilities of its foreign subsidiary stated
in local functional currency to U.S. dollars at the rates of exchange in effect
at the end of the period. Revenues and expenses are translated using rates
of
exchange in effect during the period. Gains and losses from currency translation
are included in other comprehensive income (loss).
Revenue
Recognition
Revenue
arrangements with multiple elements are divided into separate units of
accounting if certain criteria are met, including whether the delivered item
has
value to the customer on a stand-alone basis and whether there is objective
and
reliable evidence of the fair value of the undelivered items. Consideration
received is allocated among the separate units of accounting based on their
respective fair values, and the applicable revenue recognition criteria are
considered separately for each of the separate units.
Non-refundable
up-front payments received in connection with research and development
collaboration agreements, including technology advancement funding that is
intended for the development of the Company’s core technology, are deferred and
recognized on a straight-line basis over the relevant period specified in the
agreement, generally the research term.
71
Revenue
related to research with the Company’s corporate collaborators is recognized as
research services are performed over the related funding periods for each
contract. Under these agreements, the Company is required to perform research
and development activities as specified in each respective agreement. The
payments received under each respective agreement are not refundable and are
generally based on a contractual cost per full-time equivalent employee working
on the project. Research and development expenses under the collaborative
research
agreements approximate or exceed the revenue recognized under such agreements
over the terms of the respective agreements. Deferred revenue may result when
the Company does not incur the required level of effort during a specific period
in comparison to funds received under the respective contracts. Payments
received relative to substantive, at-risk incentive milestones, if any, are
recognized as revenue upon achievement of the incentive milestone event because
the Company has no future performance obligations related to the payment.
Incentive milestone payments are triggered either by results of the Company’s
research efforts or by events external to the Company, such as regulatory
approval to market a product.
The
Company also had licensed technology to various biotechnology, pharmaceutical
and contract manufacturing companies. Under these arrangements, the Company
received nonrefundable license payments in cash. These payments are recognized
as revenue when received, provided the Company has no future performance or
delivery obligations under these agreements. Otherwise, revenue is deferred
until performance or delivery is satisfied. Certain of these license agreements
also provided the licensee an option to acquire additional licenses or
technology rights for a fixed period of time. Fees received for such options
were deferred and recognized at the time the option is exercised or expires
unexercised. Additionally, certain of these license agreements involved
technology that the Company has licensed or otherwise acquired through
arrangements with third parties pursuant to which the Company was required
to pay a royalty equal to a fixed percentage of amounts received by the Company
as a result of licensing this technology to others. Such royalty obligations
were recorded as a reduction of the related revenue. Furthermore, the Company
received royalty and profit sharing payments under a licensing agreement with
a
contract manufacturing company. Royalty and profit sharing payments were
recognized as revenue when received. The Company also provided contract research
services for research and development manufacturing of biological materials
for
other companies. Under these contracts, the Company generally received payments
based on a contractual cost per full-time equivalent employee working on the
project. Revenue was recognized for actual research work performed during the
period.
Critical
Accounting Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and
accompanying notes. Actual results could differ from those
estimates.
The
Company believes the accrual for clinical trial expense represents its most
significant estimate used in the preparation of its consolidated financial
statements. The Company’s accruals for clinical trial expenses are based in part
on estimates of services received and efforts expended pursuant to agreements
established with clinical research organizations and clinical trial sites.
The
Company has a history of contracting with third parties that perform various
clinical trial activities on behalf of the Company in the ongoing development
of
its biopharmaceutical drugs. The financial terms of these contracts are subject
to negotiations and may vary from contract to contract and may result in uneven
payment flows. The Company determines its estimates through discussion with
internal clinical personnel and outside service providers as to progress or
stage of completion of trials or services and the agreed upon fee to be paid
for
such services. The objective of the Company’s clinical trial accrual policy is
to reflect the appropriate trial expenses in its consolidated financial
statements by matching period expenses with period services and efforts
expended. In the event of early termination of a clinical trial, the Company
accrues expenses associated with an estimate of the remaining, non-cancelable
obligations associated with the winding down of the trial.
Stock-Based
Compensation
In
December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004) or (“FAS
123R”), “Share-Based Payment”. FAS 123R supersedes Accounting Principles
Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and
requires companies to recognize compensation expense, using a fair-value based
method, for costs related to share-based payments, including stock options
and
employee stock purchase plans. FAS 123R permits public companies to adopt
its requirements using either the modified prospective or modified retrospective
transition method.
The
Company adopted FAS 123R on July 1, 2005 using the modified
prospective transition method, which requires that stock-based compensation
cost
be recognized for all awards granted, modified or settled after the effective
date as well as for all awards granted to employees prior to the effective
date
that remain unvested as of the effective date (see Note 11 for more
information).
Research
and Development Expenses
Research
and development expenses, which consist of costs incurred for independent and
collaborative research and development and include direct and research- related
overhead expenses and the costs of funding clinical studies, are expensed as
incurred.
Cash,
Cash Equivalents and Investments
Cash
equivalents consist of highly liquid investments with original maturities at
the
date of purchase of three months or less. Short-term investments mature in
less
than one year from the balance sheet date.
The
Company classifies its cash equivalents and investments as “available-for-sale.”
Such investments are recorded at fair value, determined based on quoted market
prices, and unrealized gains and losses, which are considered to be temporary,
are recorded as other comprehensive income (loss) in a separate component of
stockholders’ equity until realized. The cost of securities sold is based on the
specific identification method.
The
Company places its cash, cash equivalents, and investments with financial
institutions with high credit quality, in commercial paper and corporate debt
with high credit ratings, and in U.S. government and government agency
securities. Therefore, the Company believes that its exposure due to
concentration of credit risk is minimal and has not experienced credit losses
on
investments in these instruments to date.
72
Depreciation
and Amortization
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over
the
estimated useful lives of the respective assets (generally three to seven
years). Leasehold improvements are amortized over the shorter of the estimated
useful lives of the assets or the applicable lease term.
Goodwill
and Intangible Assets
Goodwill
consists of the goodwill related to the Company’s acquisition of PolyMASC. Prior
to July 1, 2002, amortization of goodwill and purchased intangibles
was calculated on the straight-line basis over the estimated useful lives of
the
intangible assets of three years, and amortization of assembled workforce and
goodwill was included as a separate item on the Consolidated Statements of
Operations. Effective July 1, 2002, assembled workforce and goodwill
are no longer being amortized but are subject to an impairment analysis on
at
least an annual basis in accordance with the requirements of Statement of
Financial Accounting Standards No. 142, (“SFAS 142”) “Goodwill and
Other Intangible Assets”. The Company performed impairment analyses in
accordance with SFAS 142 at June 30, 2007, 2006 and 2005, and
determined that in each case goodwill was not impaired.
Long-Lived
Assets
The
Company accounts for its long-lived assets under Statement of Financial
Accounting Standards No. 144 (“SFAS 144”), “Accounting for the
Impairment or Disposal of Long-Lived Assets”. In accordance with SFAS 144,
the Company identifies and records impairment losses, as circumstances dictate,
on long-lived assets used in operations when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated
to
be generated by those assets are less than the carrying amounts of those assets.
The Company’s long-lived assets consist primarily of machinery and
equipment.
Net
Loss Per Share
Basic
loss per share is computed by dividing loss applicable to common stockholders
by
the weighted-average number of shares of common stock outstanding during the
period, net of certain common shares outstanding that are held in escrow or
subject to the Company’s right of repurchase. Diluted earnings per share include
the effect of options and warrants, if dilutive. Diluted net loss per share
has
not been presented separately as, given our net loss position for all periods
presented, the result would be anti-dilutive.
A
reconciliation of shares used in the calculation of basic and diluted net loss
per share follows (in thousands, except per share amounts):
|
Year ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
loss
|
$ | (3,733 | ) | $ | (15,337 | ) | $ | (11,083 | ) | |||
|
Basic
and Diluted:
|
||||||||||||
|
Weighted
average shares of common stock outstanding
|
17,078
|
15,537
|
13,123
|
|||||||||
|
Less:
Shares in escrow, subject to return
|
―
|
(2 | ) | (2 | ) | |||||||
|
Less:
Shares subject to repurchase
|
—
|
—
|
(93 | ) | ||||||||
|
Less:
Shares subject to forfeiture
|
(26 | ) | (82 | ) |
—
|
|||||||
|
Weighted-average
shares of common stock used in computing net loss per
share
|
17,052
|
15,453
|
13,028
|
|||||||||
|
Basic
and diluted net loss per share
|
$ | (0.22 | ) | $ | (0.99 | ) | $ | (0.85 | ) | |||
The
computation of basic net loss per share excludes the following shares of common
stock, which were outstanding but held in escrow or subject to the Company’s
right to repurchase or forfeiture:
|
|
·
|
A
total of 2,106 shares of common stock issued in December 2002 in
partial consideration for a license agreement. The 2,106 shares of
common
stock were returned to the Company and cancelled upon termination
of the
license agreement in
October 2006.
|
|
|
·
|
92,500
weighted average shares of common stock that were subject to a repurchase
option of the Company as of
June 30, 2005.
|
|
|
·
|
A
weighted average total of 26,308 and 82,330 shares of common stock
that
were subject to shares vesting based on continued employment during
the
year ended June 30, 2007 and 2006,
respectively.
|
The
following options and warrants have been excluded from the calculation of
diluted net loss per share because the effect of inclusion would be
antidilutive.
|
|
·
|
Options
to purchase 2,569,409 shares of common stock at a weighted average
price
of $5.76 per share, options to purchase 3,717,787 shares of common
stock
at a weighted average price of $6.14 per share and options to purchase
2,319,674 shares of common stock at a weighted average price of $8.45
per
share at June 30, 2007, 2006 and 2005,
respectively.
|
|
|
·
|
Warrants
to purchase 4,724,944 shares of common stock at a weighted average
price
of $3.84 per share at June 30, 2007 and 2006 and warrants to
purchase 3,666,575 shares of common stock at a weighted average price
of
$4.09 per share at
June 30, 2005.
|
73
The
options, common stock warrants, and shares of outstanding common stock subject
to share vesting will be included in the calculation of loss per share at such
time as the effect is no longer antidilutive, as calculated using the treasury
stock method for options and warrants.
401(k) Plan
In
April 1997, the Board of Directors adopted the 1997 Valentis, Inc.
401(k) Plan (the “401(k) Plan”) in accordance with
Section 401(k) of the Internal Revenue Code. All employees who
complete at least 1,000 hours of service during the year are eligible to
participate in the 401(k) Plan. Participants may elect to have up to 75% of
their annual salary, not to exceed the annual dollar limit set by law, deferred
and contributed to the 401(k) Plan. The Company has the discretion to make
a matching contribution in common stock each year for every dollar contributed
to the 401(k) Plan. The stock match vests according to the employee’s years
of employment with the Company. In August 2006, The Company terminated the
401(k) Plan and the assets of the 401(k) Plan were liquidated and distributed
to
each participant.
Recent
Accounting Pronouncements
In
February 2006, the FASB issued Statement of Financial Accounting Standards
No. 155, Accounting for Certain Hybrid Financial Instruments — an
amendment of FASB Statements No. 133 and 140 (“SFAS No. 155”).
SFAS No. 155 permits an entity to measure at fair value any financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. This statement is effective for all financial instruments acquired,
issued, or subject to a remeasurement event occurring after the beginning of
an
entity’s first fiscal year that begins after September 15, 2006. The
Company does not expect the adoption of SFAS No. 155 to have a material
impact on its consolidated financial statements.
In
June 2006, the FASB issued FASB Interpretation No. (FIN) 48,
Accounting for Uncertainty in Income Taxes — An Interpretation of FASB
Statement No. 109 (“FIN48”), which prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 will be effective for fiscal years beginning after December 15, 2006.
The Company does not expect the adoption of FIN48 to have a material impact
on
its consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements “ (SFAS No. 157)”, which
defines fair value, establishes a framework for measuring fair value under
Generally Accepted Accounting Principles (“GAAP”), and expands disclosures about
fair value measurements. SFAS No. 157 will be effective for fiscal years
beginning after November 15, 2007. The Company does not expect the adoption
of SFAS No. 157 to have a material impact on its consolidated financial
statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB
108”), “Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB 108 is effective for
fiscal years ending on or after November 15, 2006 and addresses how
financial statement errors should be considered from a materiality perspective
and corrected. The literature provides interpretive guidance on how the effects
of the carryover or reversal of prior year misstatements should be considered
in
quantifying a current year misstatement. Historically there have been two common
approaches used to quantify such errors: (i) the “rollover” approach, which
quantifies the error as the amount by which the current year income statement
is
misstated, and (ii) the “iron curtain” approach, which quantifies the error
as the cumulative amount by which the current year balance sheet is misstated.
The SEC Staff believes that companies should quantify errors using both
approaches and evaluate whether either of these approaches results in
quantifying a misstatement that, when all relevant quantitative and qualitative
factors are considered, is material. The Company adopted the provisions of
SAB
108 in fiscal year ended June 30, 2007 and it had no impact on its
consolidated financial statements.
In
February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 creates a “fair value option” under
which an entity may elect to record certain financial assets or liabilities
at
fair value upon their initial recognition. Subsequent changes in fair value
would be recognized in earnings as those changes occur. The election of the
fair
value option would be made on a contract-by contract basis and would need to
be
supported by concurrent documentation or a preexisting documented policy. SFAS
159 requires an entity to separately disclose the fair value of these items
on
the balance sheet or in the footnotes to the financial statements and to provide
information that would allow the financial statement user to understand the
impact on earnings from changes in the fair value. SFAS 159 is effective as
of
the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The Company does not expect the adoption of SFAS
No. 159 to have a material impact on its consolidated financial
statements.
Business
Segments
The
Company has no product revenue and operated in one business segment, the
research and development of cardiovascular therapeutics and associated delivery
systems. Following the announcement of negative results in its Phase IIb
clinical trial of VLTS 934 in PAD in July 2006, the Company ceased all
activities on the research and development of cardiovascular therapeutics and
associated delivery systems and sold most of the related potential products
and
technologies. The Company currently operates in one business segment,
the design and implementation of innovative products for patients with
urological ailments.
74
Reclassifications
In
fiscal
year 2007, the Company changed its classification of patent costs to be a
general and administrative expense, which had previously been classified as
a
research and development expense. This is consistent with Statement of Financial
Accounting Standard No. 2 (“SFAS No. 2”) on Accounting for Research
and Development Costs”. SFAS No. 2 requires that research and development costs
exclude legal work in connection with patent applications, litigation and the
sale or licensing of patents. The Company made the reclassification to better
reflect the legal expenses incurred related to active research and development
activities as legal expenses which are more administrative in nature and
accordingly should be charged to general and administrative expense. The impact
of this reclassification on the Company’s previously reported research and
development and general and administrative expenses in the years ended June
30,
2006 and 2005 is as follows:
|
|
Year
ended
|
Year
ended
|
||||||
|
(in
thousands)
|
June
30, 2006
|
June
30, 2005
|
||||||
|
|
|
|
||||||
|
Research
and development as previously reported
|
$ |
11,228
|
$ |
9,169
|
||||
|
Reclassification
of patent expense
|
(381 | ) | (346 | ) | ||||
|
Research
and development as currently reported
|
$ |
10,847
|
$ |
8,823
|
||||
|
|
||||||||
|
General
and administrative as previously reported
|
$ |
4,987
|
$ |
3,763
|
||||
|
Reclassification
of patent expense
|
381
|
346
|
||||||
|
General
and administrative as currently reported
|
$ |
5,368
|
$ |
4,109
|
||||
|
2.
|
FINANCIAL
INSTRUMENTS
|
At
June 30, 2007 and 2006, financial instruments held by the Company
consist of the following (in thousands):
|
Amortized
Cost
|
Unrealized
Gain/(Loss)
|
Estimated
Fair Value
|
||||||||||
|
June 30,
2007
|
||||||||||||
|
Money
market mutual funds
|
$ |
1
|
$ |
—
|
$ |
1
|
||||||
|
Commercial
paper
|
―
|
—
|
―
|
|||||||||
|
Corporate
debt securities
|
―
|
—
|
―
|
|||||||||
|
1
|
—
|
1
|
||||||||||
|
Less
amounts classified as cash equivalents
|
(1
|
)
|
—
|
(1
|
)
|
|||||||
|
Total
short-term investments
|
$ |
―
|
$ |
—
|
$ |
―
|
||||||
|
June 30,
2006
|
||||||||||||
|
Money
market mutual funds
|
$ |
2,936
|
$ |
—
|
$ |
2,936
|
||||||
|
Commercial
paper
|
699
|
—
|
699
|
|||||||||
|
Corporate
debt securities
|
750
|
—
|
750
|
|||||||||
|
4,385
|
—
|
4,385
|
||||||||||
|
Less
amounts classified as cash equivalents
|
(3,635
|
)
|
—
|
(3,635
|
)
|
|||||||
|
Total
short-term investments
|
$ |
750
|
$ |
—
|
$ |
750
|
||||||
Unrealized
gains or losses have not been material and have been presented net. There were
no realized gains or losses in any period presented. The Company’s cash and cash
equivalents, interest and other receivables, accounts payable and note payable
are carried at historical cost, which approximates fair value because of the
short-term nature of these accounts.
|
3.
|
PROPERTY
AND
EQUIPMENT
|
Property
and equipment consist of the following (in thousands):
|
June 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Machinery
and equipment
|
$ |
205
|
$ |
6,309
|
||||
|
Furniture
and fixtures
|
43
|
1,262
|
||||||
|
Leasehold
improvements
|
―
|
9,868
|
||||||
|
248
|
17,439
|
|||||||
|
Less
accumulated depreciation and amortization
|
(243 | ) | (17,402 | ) | ||||
|
Property
and equipment, net
|
$ |
5
|
$ |
37
|
||||
75
|
4.
|
GOODWILL
|
At
June 30, 2007 and 2006, goodwill is associated with the acquisition of
PolyMASC Pharmaceuticals, plc. in fiscal 2000. The Company performed
impairment analyses in accordance with SFAS 142 and determined that
goodwill was not impaired during any of the periods presented.
|
5.
|
OTHER
ACCRUED LIABILITIES
|
Other
accrued liabilities consist of the following (in thousands):
|
June 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Accrued
research and development expenses
|
$ |
―
|
$ |
172
|
||||
|
Accrued
rent
|
―
|
50
|
||||||
|
Accrued
property and use taxes
|
―
|
98
|
||||||
|
Accrued
legal expenses
|
11
|
124
|
||||||
|
Accrued
accounting fees
|
100
|
194
|
||||||
|
Accrued
SEC filing related costs
|
181
|
―
|
||||||
|
Other
|
20
|
67
|
||||||
|
Total
|
$ |
312
|
$ |
705
|
||||
|
6.
|
NOTE
PAYABLE TO RELATED PARTY
|
In
June,
2007, Valentis, upon approval of its Board of Directors, issued Benjamin F.
McGraw, III, Pharm.D., Valentis’ Chief Executive Officer, President and
Treasurer, a promissory note in the amount of $176,000 in lieu of accrued bonus
compensation owed to Dr. McGraw. The note bears interest at the rate of 5.0%
per
annum, may be prepaid by Valentis in full or in part at any time without premium
or penalty and is due and payable in full on December 25, 2007.
|
7.
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS
|
Comprehensive
loss is comprised of net loss and other comprehensive loss. Other comprehensive
loss includes certain changes to stockholders’ equity of the Company that are
excluded from net loss. The components of accumulated other comprehensive loss
are as follows (in thousands):
|
June 30, 2007
|
June 30, 2006
|
||||||||
|
Unrealized
loss on available-for-sale securities
|
$—
|
$―
|
|||||||
|
Foreign
currency translation adjustments
|
(693
|
)
|
(693
|
)
|
|||||
|
Accumulated
other comprehensive loss
|
$(693
|
)
|
$(693
|
)
|
|||||
The
Company’s wholly owned subsidiary has been inactive in June 30, 2007 and 2006
which is why there is no change in foreign currency translation adjustments
during these years.
|
8.
|
STOCKHOLDERS’
EQUITY
|
Common
Stock
In
June 2005, the Company completed a private placement, in which the Company
issued and sold 1,680,840 shares of the Company’s common stock and warrants,
exercisable for a five-year period, to purchase up to 840,420 additional shares
of the Company’s common stock at $2.50 per unit, for net proceeds of
approximately $3.9 million. The warrants are exercisable at $3.51 per
share. In addition, the Company issued to the designees of Reedland Capital
Partners, the placement agent of the private placement, warrants to purchase
63,000 shares of common stock at $3.29 per share, exercisable for a five-year
period.
In
March 2006, the Company completed an additional private placement, in which
the Company issued and sold 2,100,000 shares of the Company’s common stock and
warrants, exercisable for a five-year period, to purchase up to 1,050,000
additional shares of the Company’s common stock at $2.50 per unit, for net
proceeds of approximately $5.0 million. The warrants are exercisable at
$3.00 per share. In addition, the Company issued to the designees of Griffin
Securities, Inc., the placement agent of the private placement, warrants to
purchase 22,500 shares of common stock at $3.00 per share, exercisable for
a
five-year period.
In
August 2004, the Company issued warrants, exercisable at any time for a
five-year period, to purchase a total of 100,000 shares of common stock to
four
individuals who are non-employees of Valentis. These warrants are exercisable
at
$6.30 per share. The Company estimated the fair value of the warrants using
the
Black-Scholes option-pricing model and recorded the resulting general and
administrative expense of $454,000 in the year ended June 30, 2005.
Assumptions used for valuing these warrants were an estimated volatility of
96%,
risk free interest rate of 3.64%, no dividend yield and an expected life of
5 years.
76
Stock
Issued Under the Valentis Inc. 401(k) Plan
Pursuant
to the Valentis, Inc. 401(k) Plan (the “401(k) Plan”), the
Company made matching contributions to all eligible participants who had
elective deferrals during calendar year 2005 and 2004, equal to 25% of each
such
eligible participant’s elective deferrals during such year in the form of shares
of the Company’s common stock. In fiscal year 2006, Valentis contributed
24,336 shares of its common stock to the 401(k) Plan as the Company’s
fiscal year 2006 matching contributions. In fiscal year 2005, Valentis
contributed 20,016 shares of its common stock to the 401(k) Plan as the
Company’s fiscal year 2005 matching contributions. Compensation expense
related to this match was approximately $62,000 and $55,000 in fiscal year
2006 and 2005, respectively. In August 2006, the Company
terminated the 401(k) Plan and the assets of the 401(k) Plan were liquidated
and
distributed to each participant. The Company did not make any
matching contributions in fiscal year 2007.
Shares
of Common Stock Reserved for Issuance
At
June 30, 2007, shares of common stock reserved for future issuance are
as follows:
|
Number of
shares
|
||||
|
Common
stock warrants
|
4,749,075
|
|||
|
Employee
stock purchase plan
|
515,500
|
|||
|
Stock
option plans
|
4,858,190
|
|||
|
Total
|
10,122,765
|
|||
|
9.
|
COLLABORATIVE,
LICENSE AND RESEARCH
AGREEMENTS
|
Revenue
recognized in the fiscal years ended June 30, 2007, 2006 and 2005 is
as follows (in thousands):
|
Year ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
License
and milestone revenue:
|
||||||||||||
|
GeneSwitch®
gene regulation licenses
|
$ |
83
|
$ |
393
|
$ |
1,021
|
||||||
|
PINC™
gene delivery technology licenses
|
33
|
114
|
619
|
|||||||||
|
PEGylation
technology licenses
|
85
|
120
|
—
|
|||||||||
|
Manufacturing
technology license
|
370
|
—
|
—
|
|||||||||
|
571
|
627
|
1,640
|
||||||||||
|
Contract
research revenue
|
—
|
100
|
476
|
|||||||||
|
Other
revenue
|
—
|
—
|
61
|
|||||||||
|
Total
|
$ |
571
|
$ |
727
|
$ |
2,177
|
||||||
To
date,
substantially all revenue has been generated by collaborative research and
development agreements, from corporate partners, and from licensees, and only
minimal revenue has been generated from royalties on sales of the GeneSwitch®
gene regulation system to the research market. Under the terms of corporate
collaborations, the Company historically received research and development
funding on a quarterly basis in advance of associated research and development
costs.
License-out
agreements
The
Company had licensed-out its proprietary GeneSwitch® gene regulation technology
on a non-exclusive basis to Wyeth-Ayerst Laboratories, GlaxoSmithKline, LARNAX
GmbH, Schering AG and Organon Laboratories, LTD for research purposes. In
addition, the Company had licensed its gene delivery technology on a
non-exclusive basis to IDM Pharma, Inc and on a exclusive basis to Juvaris
BioTherapeutics. Further, the Company had licensed to Schering AG the exclusive,
worldwide rights to its GeneSwitch® gene regulation and gene delivery
technologies to develop and commercialize two gene-based therapeutic products.
These agreements generally included (i) up front payments and annual
maintenance fees; and, (ii) milestone and royalty payments. The Company had
also established a non-exclusive cross license with Genzyme Corporation in
which
Genzyme receives rights to GeneSwitch® gene regulation technology for research
use and the Company receives certain rights to Genzyme’s plasmid DNA
manufacturing technology.
As
part
of its efforts seeking strategic opportunities following the announcement of
negative results in its Phase IIb clinical trial of VLTS 934 in PAD in
July 2006, Valentis sold its intellectual property rights related to all of
the above technologies.
During
fiscal 2007, the Company licensed-out its manufacturing plasmid DNA technologies
to several companies on a non-exclusive, worldwide, royalty-free, fully paid
up
basis. In addition, the Company granted a license to Acacia Patent Acquisition
Corporation (“APAC”) for the purpose of asserting Valentis’ patents related to
its plasmid DNA manufacturing technologies. APAC agreed to pay Valentis a
continuing royalty equal to fifty percent of all amounts and other consideration
actually received by APAC from its exercise of rights granted in the license,
less APAC costs incurred.
Revenues,
in aggregate, recognized from license agreements were approximately $571,000,
$627,000 and $1.6 million for the fiscal year ended
June 30, 2007, 2006 and 2005, respectively.
77
Contract
research agreements
Valentis
had entered into contract research agreements with other companies. Under the
agreements, we were required to conduct research on the manufacturing of certain
biological materials for other companies. For the years ended
June 30, 2006 and 2005, we recognized approximately $100,000 and
$476,000 of contract research revenue, respectively, based on research performed
during the years, and recorded approximately $93,000 and $521,000 of costs
of
contract research, respectively, which included direct and related overhead
expenses incurred and costs of general and administrative support. The Company
did not conduct any contract research for other companies during the year ended
June 30, 2007.
Sponsored
research agreements
Valentis
had entered into several sponsored research agreements with universities. These
agreements were generally cancelable by either party upon written notice and
may
be extended by mutual consent of both parties. Research and development expenses
were recognized as the related services were performed, generally ratably over
the period of service. The Company cancelled these agreements following the
announcement of negative results in its Phase IIb clinical trial of VLTS 934
in
PAD in July 2006. There was no expense incurred under these
agreements during the fiscal year ended June 30, 2007. Expenses under
these agreements were approximately $57,000 and $74,000 for the fiscal years
ended June 30, 2006 and 2005, respectively.
|
10.
|
RESTRUCTURING
CHARGES
|
Following
Valentis’ announcement regarding the results of its clinical trial for
VLTS 934 in July 2006, Valentis announced restructuring activities,
including a workforce reduction of approximately 55% of its employees on
August 18, 2006. Further reductions of approximately 55% of Valentis’
remaining workforce occurred through the end of August and October 2006,
including the termination of employment of John J. Reddington, Ph.D., DVM.,
the
Company’s Chief Operating Officer, and Joseph A. Markey, the Vice President of
Finance and Administration on October 31, 2006. In July 2007, Valentis
terminated the employment of Benjamin F. McGraw, III, its President, Chief
Executive Officer and Treasurer. The total costs associated with the
reduction in workforce were approximately $1.03 million, related to severance
benefits which have been recognized as restructuring charges and $921,000 has
been paid as of June 30, 2007. The remaining unpaid amount of $108,000
as of June 30, 2007 was paid in July 2007.
In
accordance with FAS 123R, the Company recorded approximately
$1.3 million of stock-based compensation expenses for the year ended
June 30, 2007, of which $164,000 was included in research and
development expense and $1.17 million was included in general and administrative
expense, and the Company recorded approximately $1.4 million of employee
stock-based compensation expenses for the year ended June 30, 2006, of
which $503,000 was included in research and development expense and $944,000
was
included in general and administrative expense. The adoption of FAS 123R
had the impact of a loss of $0.08 and $0.09 on the Company’s net loss per share
for the year ended June 30, 2007 and 2006, respectively. The adoption
of FAS 123R had no impact on cash flow from operations and cash flow from
financing activities for the year ended June 30, 2007 and 2006. As of
June 30, 2007, unamortized stock-based compensation expenses of
approximately $910,000 remain to be recognized over a weighted-average period
of
2.1 years. The Company amortizes stock-based compensation expenses on a
straight-line basis over the vesting period.
In
October, 2006, the Company terminated the employment of John J. Reddington,
Ph.D., DVM., our Chief Operating Officer, and Joseph A. Markey, our Vice
President of Finance and Administration. In accordance with the
termination agreements, all outstanding share-based awards held by them became
fully vested and the period of time during which they can exercise their stock
options was extended to 14 months after the date of termination from 3 months
as
stated in the stock option grant agreements. Pursuant to FAS 123R,
the Company recorded aggregate incremental costs of approximately $116,000
resulting from the accelerated vesting and the extension of exercise period.
The
incremental costs of approximately $116,000 were reflected in the stock-based
compensation of $1.3 million that was included in the consolidated statement
of
operations for the year ended June 30, 2007.
The
Company did not grant any stock-based awards during the year ended
June 30, 2007. The Company estimated the fair value of stock options
granted during the year ended June 30, 2006 using the
Black-Scholes-Merton option pricing model. The weighted-average assumptions
used
under this model are as follows: 1) Due to insufficient relevant historical
option exercise data, the expected term of the options was estimated to be
6.1 years using the “simplified” method suggested in the Securities and
Exchange Commission’s Staff Accounting Bulletin No. 107; 2) Expected
volatility was estimated to be 143% based on the Company’s historical volatility
that matched the expected term; 3) Risk-free interest rate of 4.5% is based
on
the U.S. Treasury yield curve in effect at the time of grant for periods
corresponding with the expected term of the option; 4) The Company assumed
a
zero percent dividend yield. In addition, under FAS 123R, fair value of
stock options granted is recognized as expense over the vesting period, net
of
estimated forfeitures. Estimated annual forfeiture rate was based on historical
data and anticipated future conditions. The estimation of forfeitures requires
significant judgment, and to the extent actual results or updated estimates
differ from our current estimates, such amounts will be recorded in the period
estimates are revised.
78
Prior
to
the adoption of FAS 123R on July 1, 2005, the Company accounted
for its stock-based employee compensation expenses under the recognition and
measurement provision of APB 25, “Accounting for Stock Issued to Employees,” and
related interpretations. Under APB 25, if the exercise price of the
Company’s employee stock options equaled or exceeded the market price of the
underlying stock on the date of grant, no compensation expense was recognized.
The following table illustrates the effect on net loss and net loss per share
if
the fair value method of FAS 123 had been applied to the year ended
June 30, 2005.
|
Year
Ended
|
||||
|
June 30,
2005
|
||||
|
Net
loss applicable to common stockholders—as reported
|
$ | (11,083 | ) | |
|
Deduct:
Stock-based employee stock compensation expense determined under
SFAS 123
|
(3,195 | ) | ||
|
Net
loss applicable to common stockholders—pro forma
|
$ | (14,278 | ) | |
|
Net
loss applicable to common stockholders per share—as
reported
|
$ | (0.85 | ) | |
|
Net
loss applicable to common stockholders per
share—pro forma
|
$ | (1.10 | ) | |
The
weighted-average assumptions used for the valuation of options granted during
the years ended June 30, 2005 were as follows: expected term of 4.2
years; risk-free interest rate of 4.22%; expected volatility of 120%; and
expected dividend yield of zero percent.
At
June 30, 2007, the Company has the following stock-based compensation
plans:
The
1997
Equity Incentive Plan, as amended and restated in December 2005 (the
“Incentive Plan”), provides for grants of stock options and awards to employees,
directors and consultants of the Company. The exercise price of options granted
under the Incentive Plan is determined by the Board of Directors but cannot
be
less than 100% of the fair market value of the common stock on the date of
the
grant. Generally, options under the Incentive Plan vest 25% one year after
the
date of grant and on a pro rata basis over the following 36 months and expire
upon the earlier of ten years after the date of grant or 90 days after
termination of employment. Options granted under the Incentive Plan cannot
be
repriced without the prior approval of the Company’s stockholders. As of
June 30, 2007, an aggregate of 3.7 million shares have been authorized for
issuance and options to purchase approximately 2.4 million shares of common
stock had been granted under the Incentive Plan.
Pursuant
to the terms of the 1998 Non-Employee Directors’ Plan, as amended and restated
in December 2004 (the “Director’s Plan”), each non-employee director, other
than a non-employee director who currently serves on the Board of Directors,
automatically shall be granted, upon his or her initial election or appointment
as a non-employee director, an option to purchase 26,000 shares of common stock,
and each person who is serving as a non-employee director on the day following
each Annual Meeting of Stockholders automatically shall be granted an option
to
purchase 10,000 shares of common stock. Generally, options under the 1998
Non-Employee Directors’ Plan vest monthly over 4 years and expire upon the
earlier of ten years after the date of grant or 90 days after termination of
employment. As of June 30, 2007, an aggregate of 575,000 shares have
been authorized for issuance under the Directors’ Plan, and options to purchase
approximately 222,000 shares of common stock had been granted to non-employee
directors under the Directors’ Plan.
The
2001
Nonstatutory Incentive Plan, as amended and restated in May 2003 (the “NQ
Plan”), provides for grants of nonstatutory stock options to employees,
directors and consultants of the Company. The exercise price of options granted
under the NQ Plan is determined by the Board of Directors but cannot be less
than 100% of the fair market value of the common stock on the date of the grant.
Generally, options under the NQ Plan vest 25% one year after the date of grant
and on a pro rata basis over the following 36 months and expire upon the
earlier of ten years after the date of grant or 90 days after termination of
employment. Options granted under the NQ Plan cannot be repriced without the
prior approval of the Company’s stockholders. As of June 30, 2007, an
aggregate of 690,000 shares have been authorized for issuance and options to
purchase approximately 77,000 shares had been granted under the NQ
Plan.
In
May 2003, the Board of Directors adopted the 2003 Employee Stock Purchase
Plan (the “Purchase Plan”) covering an aggregate of 600,000 shares of common
stock. The Purchase Plan was approved by stockholders in May 2003 and is
qualified under Section 423 of the Internal Revenue Code. The Purchase Plan
is designed to allow eligible employees of the Company to purchase shares of
common stock through periodic payroll deductions. The price of common stock
purchased under the Purchase Plan must be equal to at least 85% of the lower
of
the fair market value of the common stock on the commencement date of each
offering period or the specified purchase date. 515,500 shares reserved under
the Purchase Plan remain available for issuance as of June 30, 2007.
Currently none of our employees are participating in the Purchase Plan and
there is no remaining employee payroll contributions left in the Purchase
Plan.
In
fiscal
year 2006, the Company granted options to consultants to purchase
50,000 shares of common stock. There were no options granted to consultants
in fiscal year 2007 and 2005. Options granted to consultants are periodically
revalued as they vest in accordance with SFAS 123 and EITF 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees
for
Acquiring, or in Conjunction with Selling, Goods or Services", using
the Black-Scholes option-pricing model. Assumptions used for valuing the options
for fiscal 2007 were an estimated volatility of 162%, risk free interest
rate of 4.99%, no dividend yield and an expected life of each option of
7.25 years. Assumptions used for valuing the options for fiscal 2006
were an estimated volatility of 133%, risk free interest rate of 4.61%, no
dividend yield and an expected life of each option of 7.72 years.
Assumptions used for valuing the options for fiscal 2005 were an estimated
volatility of 115%, risk free interest rate of 4.26%, no dividend yield and
an
expected life of each option of 8.74 years. Expenses of approximately
$1,000, $63,000, and $63,000 were recognized in fiscal 2007, 2006 and 2005,
respectively, related to these grants. All of the unvested shares
related to these options granted to consultants were cancelled in
September 2006 due to the termination of consulting
agreements.
79
In
August 2004, the Company issued warrants, exercisable at any time for a
five-year period, to purchase a total of 100,000 shares of common stock to
four
individuals who are non-employees of the Company. These warrants are exercisable
at $6.30 per share. The Company estimated the fair value of the warrants using
the Black-Scholes option-pricing model and recorded the resulting general and
administrative expense of $454,000 in the year ended June 30, 2005.
Assumptions used for valuing these warrants were an estimated volatility of
96%,
risk free interest rate of 3.64%, no dividend yield and an expected life of
5 years.
In
April 2005, the Company obtained the consulting services of an investor
relations company. Pursuant to a services agreement, the Company paid a cash
fee
of $100,000 and issued 18,796 shares of the Company’s common stock, at an
aggregated fair value of approximately $52,000, to the investor relations
company. The total compensation of approximately $152,000 for consulting
services was expensed ratably over the term of the agreement of one year. For
the year ended June 30, 2006 and 2005, the company recorded $38,000
and $114,000 of general and administrative expenses under this agreement,
respectively.
Activity
under all option plans for the year ended June 30, 2007, 2006 and 2005
is as follows:
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
(in 000s)
|
||||||||||||||||
|
Options
outstanding at June 30, 2004
|
1,744,280
|
$ |
11.24
|
9.14
|
$ |
4,832
|
||||||||||
|
Options
granted
|
692,354
|
$ |
6.09
|
|||||||||||||
|
Options
forfeited
|
(116,960 | ) | $ |
36.20
|
||||||||||||
|
Options
outstanding at June 30, 2005
|
2,319,674
|
$ |
8.45
|
8.45
|
$ |
66
|
||||||||||
|
Options
granted
|
1,500,250
|
$ |
2.91
|
|||||||||||||
|
Options
forfeited
|
(41,428 | ) | $ |
3.91
|
||||||||||||
|
Options
expired
|
(60,709 | ) | $ |
15.64
|
||||||||||||
|
Options
outstanding at June 30, 2006
|
3,717,787
|
$ |
6.14
|
8.29
|
$ |
761
|
||||||||||
|
Options
forfeited
|
(683,188 | ) | $ |
3.30
|
||||||||||||
|
Options
expired
|
(465,190 | ) | $ |
12.47
|
||||||||||||
|
Options
outstanding at June 30, 2007
|
2,569,409
|
$ |
5.76
|
7.25
|
$ |
0.00
|
||||||||||
|
Options
exercisable at June 30, 2007
|
2,097,834
|
$ |
6.26
|
7.02
|
$ |
0.00
|
||||||||||
The
weighted average fair value of options granted during the years ended
June 30, 2006 and 2005 was $2.69 and $4.76, respectively. Unrecognized
compensation with respect to options that will be recognized in future periods
was approximately $910,000 at June 30, 2007.
The
options outstanding at June 30, 2007 have been segregated into ranges for
additional disclosure as follows:
|
Exercise
Price
Per Share
|
Options
Outstanding
|
Weighted Average
Remaining
Contractual Life
(in years)
|
Weighted
Average
Exercise
Price
|
Options Vested
and
Exercisable
|
Weighted
Average
Exercise
Price
|
||||||||||||
|
$1.97
– $ 2.75
|
215,000
|
8.06
|
$2.28
|
149,375
|
$
2.27
|
||||||||||||
|
$2.80
– $ 2.80
|
371,875
|
8.00
|
$2.80
|
249,479
|
$
2.80
|
||||||||||||
|
$3.14
– $ 3.14
|
449,875
|
8.96
|
$3.14
|
241,750
|
$
3.14
|
||||||||||||
|
$3.19
– $ 3.39
|
177,000
|
5.92
|
$3.27
|
177,000
|
$
3.27
|
||||||||||||
|
$3.52
– $ 3.52
|
451,000
|
5.93
|
$3.52
|
451,000
|
$
3.52
|
||||||||||||
|
$4.70
– $ 4.80
|
69,000
|
6.90
|
$4.76
|
63,041
|
$ 4.77
|
||||||||||||
|
$5.35
– $ 5.35
|
425,000
|
6.75
|
$5.35
|
425,000
|
$ 5.35
|
||||||||||||
|
$6.94
– $ 6.94
|
21,628
|
7.00
|
$6.94
|
16,618
|
$ 6.94
|
||||||||||||
|
$7.02
– $ 7.02
|
361,000
|
7.11
|
$7.02
|
296,540
|
$ 7.02
|
||||||||||||
|
$21.00
– $465.00
|
28,031
|
3.44
|
$156.66
|
28,031
|
$156.66
|
||||||||||||
|
2,569,409
|
7.25
|
$5.76
|
2,097,834
|
$6.26
|
|||||||||||||
80
There
was
no nonvested share activity under our stock option plans during the year ended
June 30, 2005. Nonvested share activity under our stock option plans
for the years ended June 30, 2006 and 2007 was as
follows:
|
Nonvested
Number
of
Shares
|
Weighted
Average
Grant Date
Fair Value
|
|||||||
|
Beginning
balance at July 1, 2005
|
—
|
—
|
||||||
|
Grants
|
106,810
|
$ |
2.80
|
|||||
|
Shares
vested
|
(44,508 | ) | $ |
2.80
|
||||
|
Ending
balance at June 30, 2006
|
62,302
|
$ |
2.80
|
|||||
|
Shares
vested
|
(62,302 | ) | $ |
2.80
|
||||
|
Ending
balance at June 30, 2007
|
―
|
―
|
||||||
There
was
no unrecognized compensation with respect to nonvested shares at
June 30, 2007.
During
the year ended June 30, 2006, the Company issued 38,613 shares of
common stock to employees under the 2003 Employee Stock Purchase Plan and
recorded approximately $43,000 of compensation expenses. The Company did not
issue any common stock to employees under the 2003 Employee Stock Purchase
Plan
during the year ended June 30, 2007 and there was no unrecognized
compensation related to common stock issued to employees under the 2003 Employee
Stock Purchase Plan at June 30, 2007.
|
12.
|
OTHER
INCOME AND EXPENSE, NET
|
For
the
year ended June 30, 2007, other income and expense, net primarily
reflected nonrefundable proceeds received from the sale of most of the Company’s
remaining potential products and technologies related to cardiovascular
therapeutics and gene delivery and expression systems and gains from
sale of most of our remaining machinery, equipment, furniture and fixtures
totaling approximately $2.3 million. These proceeds received or gains were
recognized when payments were received, provided Valentis had no future
performance or delivery obligations under the agreements. In addition, these
proceeds received or gains were classified in other income and expense, net
because asset sales were part of the Company’s efforts to pursue strategic
opportunities, which include the merger with Urigen N.A. During the
year ended June 30, 2007, the Company sold substantially all of its fixed assets
and recognized a gain on the sale of fixed assets of $582,000 that is included
in other income. A summary of the various transactions are as
follows:
|
·
|
In
August 2006, the Company entered into an asset sale agreement with
Cobra
Biologics Ltd.(“Cobra”). Pursuant to the agreement, the Company
sold to Cobra certain biomanufacturing rights and intellectual property
for a purchase price of $300,000. The Company and Cobra completed
the
transaction in August 2006 and payment of $300,000 was received by
the Company and recognized as other income in the quarter ended September
30, 2006.
|
|
·
|
On
October 24, 2006, the Company entered into a technology transfer
agreement
with Vical. Pursuant to the agreement, the Company sold to Vical
(i)
certain patents and patent applications regarding (a) formulations
and
methods for the treatment of inflammatory diseases and (b) gene delivery
for ischemic conditions, (ii) all intellectual and industrial property
owned by the Companys and related to, and reasonably necessary for
Vical
to take certain actions with respect to, any of the foregoing patents
and
patent applications and (iii) all rights owned or controlled by the
Company relating exclusively to any of the foregoing patents and
patent
applications, for an aggregate cash purchase price of $30,000. In
addition, Vical agreed to assume certain liabilities of the Company
relating to the transferred assets. The Company and Vical completed
the
transaction in October 2006 and payment of $30,000 was received by
the Company and recognized as other income in the quarter ended December
31, 2006.
|
|
·
|
On
October 26, 2006, the Company entered into an asset transfer agreement
with Biolitec, Inc. (“Biolitec”). Pursuant to the agreement, the Company
sold to Biolitec (i) the Company’s PEG liposome patent, (ii) any patents
upon which the Company’s PEG liposome patent claims priority, (iii) any
corresponding foreign patents, (iv) all files of Valentis and its
affiliates relating to any of the foregoing patents and (v) all rights
owned or controlled by the Company and its affiliates relating to
any of
the foregoing patents, for an aggregate cash purchase price of $110,000.
In connection with the assets transfer, Biolitec agreed to assume
certain
liabilities of the Company relating to the transferred assets. The
Company
and Biolitec completed the transaction in October 2006 and payment of
$110,000 was received by the Company and recognized as other income
in the
quarter ended December 31, 2006.
|
|
·
|
On
October 27, 2006, the Company entered into an asset transfer agreement
with Juvaris Biotherapeutics, Inc. (“Juvaris”). Pursuant to the agreement,
the Company sold to Juvaris (i) the Company’s DOTIM lipid composition
patents, (ii) all rights owned or controlled by the Company and its
affiliates relating to the Company’s DOTIM lipid composition patents,
(iii) any patents or know-how referring to the Company’s DOTIM lipid
composition, (iv) certain cell lines and (v) all pre-clinical and
clinical
data and regulatory filings related to the foregoing assets, for
an
aggregate cash purchase price of $550,000. In connection with the
assets
transfer, Juvaris agreed to assume certain liabilities of the Company
relating to the transferred assets, and Valentis and Juvaris agreed,
as of
October 28, 2006, to terminate an existing license agreement between
the
Company and Juvaris. The Company received a fully non-recoupable
and
non-refundable deposit of $250,000 in October 2006. The remaining
amount
of $300,000 was received by the Company upon the completion of the
asset
transfer agreement in the quarter ended December 31, 2006. The
Company recognized $550,000 as other income in the quarter ended
December
31, 2006.
|
81
|
·
|
On
October 27, 2006, the Company entered into an asset purchase agreement
with Juvaris. Pursuant to the agreement, the Company sold to Juvaris
certain of the Company’s machinery, equipment, furniture and other related
assets, for an aggregate cash purchase price of $500,000. On
December 20, 2006, Valentis entered into an additional asset
purchase agreement with Juvaris. Pursuant to the agreement, the Company
sold to Juvaris certain of Valentis’ equipment, furniture and other
related assets, for an aggregate cash purchase price of $25,000.
Valentis
and Juvaris completed these two transactions and payments in full
were
received by the Company in the quarter ended December 31, 2006. In
addition, the Company sold certain of its machinery, equipment, furniture
and other related assets in an auction conducted in November 2006,
from which the Company received net proceeds of $79,000. Based on
payments
received for the two asset purchase agreements with Juvaris and the
net
proceeds received from the auction, totaling $604,000, the Company
recognized an aggregated gain on sale of assets of $581,000 as other
income in the quarter ended
December 31, 2006.
|
|
·
|
On
October 16, 2006, the Company entered into a technology transfer
agreement
with Genetronics, Inc. (“Genetronics”). Pursuant to the agreement, the
Company (i) sold to Genetronics certain patents, trademarks and
intellectual property rights relating to the Company’s PINC™ polymer
delivery system, GeneSwitch® gene regulation technology, cationic lipids
and gene expression technologies, (ii) sold to Genetronics the
Company’s GeneSwitch® product inventory and (iii) sold and assigned
to Genetronics a number of existing license agreements between the
Company
and certain third parties relating to the Company’s PINC™ polymer delivery
system and GeneSwitch® gene regulation technology, for an aggregate
purchase price of $860,000, of which a portion was offset by an
outstanding debt Valentis owed to Genetronics in the amount of $320,000
relating to a 2001 license agreement between the parties. In connection
with the technology transfer, Genetronics agreed to assume certain
liabilities of the Company relating to the transferred assets, and
the
Company and Genetronics agreed, as of October 16, 2006, to terminate
in
its entirety a license agreement between the Company and Genetronics,
dated November 14, 2001. The Company received net proceeds of
$480,000 in November 2006 and $60,000 in February 2007. Valentis
and Genetronics completed the transactions and the Company recognized
$540,000 of other income in the quarter ended
March 31, 2007.
|
|
·
|
In
January 2007, the Company entered into an asset purchase agreement
with Medarex, Inc. Pursuant to the agreement, the Company sold to
Medarex
certain of the Company’s technologies related to the Del-1 gene, Del-1
protein and certain Del-1 antibodies and related obligations
and liabilities for an aggregate purchase price of $250,000. The
Company
and Medarex completed the transaction in January 2007 and payment of
$250,000 was received by the Company and recognized as other income
in the
quarter ended March 31, 2007.
|
|
13.
|
INCOME
TAXES
|
For
financial reporting purposes, loss before taxes includes the following
components (in thousands):
|
Year ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Pre-tax
loss:
|
||||||||||||
|
United
States
|
$ | (3,733 | ) | $ | (15,337 | ) | $ | (11,083 | ) | |||
|
Foreign
|
—
|
—
|
—
|
|||||||||
|
Total
pre-tax loss
|
$ | (3,733 | ) | $ | (15,337 | ) | $ | (11,083 | ) | |||
There
is
no provision for income taxes because the Company has incurred operating losses.
Deferred income taxes reflect the net tax effects of operating loss and tax
credit carryovers and temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for
income tax purposes. Significant components of the Company’s deferred tax assets
are as follows (in thousands):
|
June 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss
|
$ |
84,683
|
$ |
77,855
|
||||
|
Research
and development credits
|
3,993
|
3,908
|
||||||
|
Capitalized
research and development
|
20,205
|
23,292
|
||||||
|
Other
|
4
|
129
|
||||||
|
Total
deferred tax assets
|
108,885
|
105,184
|
||||||
|
Valuation
allowance
|
(108,885 | ) | (105,184 | ) | ||||
|
Net
deferred tax assets
|
$ |
—
|
$ |
—
|
||||
82
Realization
of deferred tax assets is dependent upon future earnings, if any, the timing
and
amount of which are uncertain. Accordingly, the net deferred tax assets have
been fully offset by a valuation allowance. The valuation allowance reflected
increases of approximately $3.7 million and $6.1 million during 2007
and 2006, respectively.
As
of
June 30, 2007, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $220.7 million, which expire
in the years 2008 through 2027, and federal research and development tax credits
of approximately $3.0 million, which expire in the years 2008 through
2027.
As
of
June 30, 2007, the Company had net operating loss carryforwards for
state income tax purposes of approximately $129.4 million, which expire in
the years 2008 through 2017, and state research, and development tax credits
of
approximately $1.6 million, which do not expire.
Utilization
of the net operating losses and credit carryforwards may be subject to a
substantial annual limitation due to the “change in ownership” provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
|
14.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Lease
In
January 2007, Valentis terminated its existing property leases without any
material adverse effect and moved to a nearby office space on a month-to-month
basis. Upon the completion of the merger with Urigen N.A. in July 2007, the
Company relocated to Urigen N.A.’s office facilities in Burlingame, California.
The combined company currently subleases office facilities on a month-to-month
basis at a rate of $2,683 per month from EGB Advisors, LLC. EGB Advisors, LLC
is
owned solely by William J. Garner, President and CEO of Urigen Pharmaceuticals,
Inc. The sublease is terminable upon 30 days’ notice.
Gross
rent expense for the fiscal years ended June 30, 2007, 2006 and 2005
was approximately $780,000, $1.5 million and $1.2 million,
respectively. Gross sublease income for the fiscal years ended
June 30, 2007, 2006 and 2005 was approximately $462,000, $652,000 and
$517,000, respectively.
Restricted
Cash
Included
in other assets in the consolidated balance sheet as of June 30, 2006
was approximately $58,000 of restricted cash, which was required by Valentis’
bank for the establishment of a standby letter of credit related to the
Company’s utility services. In March 2007, the bank released the restrictions on
the amount as the standby letter of credit was no longer required by the utility
company. Thus, no restricted cash existed at
June 30, 2007.
Guarantees
In
the
ordinary course of its business, the Company makes certain indemnities,
commitments and guarantees under which it may be required to make payments
in
relation to certain transactions. These include indemnities of clinical
investigators and contract research organizations involved in the development
of
the Company’s clinical stage products, indemnities of contract manufacturers and
indemnities to directors and officers of the Company to the maximum extent
permitted under the laws of the State of Delaware. The duration of these
indemnities, commitments and guarantees varies, and in certain cases, is
indefinite. The majority of these indemnities, commitments and guarantees do
not
provide for any limitation of the maximum potential future payments the Company
could be obligated to make. The Company has not recorded any liability for
these
indemnities, commitments and guarantees in the accompanying consolidated balance
sheets. However, the Company accrues for losses for any known contingent
liability, including those that may arise from indemnification provisions,
when
future payment is probable and in accordance with SFAS No. 5,
Accounting for Contingencies. No such losses have been recorded to
date.
Liquidated
Damages Contingencies
In
January and June 2004, June 2005 and March 2006, the Company
completed four separate private placements of common stock for gross proceeds
of
approximately $10.0 million, $12.0 million, $4.2 million and $5.3
million, respectively.
The
Company entered into registration rights agreements with the purchasers in
these
four private placements of common stock. Pursuant to the registration rights
agreements, the Company filed with the Securities and Exchange Commission
registration statements related to the shares issued to the purchasers and
shares issuable upon the exercise of the warrants under the private placements.
In the event the Company must suspend use of the registration statements for
greater than 20 consecutive days or a total of 40 days in the
aggregate during the time the Company is required to keep the registration
statement effective under the registration rights agreements, then the Company
must pay to each purchaser in cash 1.0% of the purchaser’s aggregate purchase
price of the shares for the first month, as well as an additional 1.5% of the
purchaser’s aggregate purchase price for each additional month thereafter, while
the use of the registration statements has been suspended. The Company currently
expects to be required to maintain availability of the registration statement
for at least two years following the applicable closing.
83
In
addition, under the securities purchase agreement entered into in connection
with the private placements completed in June 2005 and March 2006,
while there is an effective registration statement and if the Company fails
to
deliver a stock certificate that is free of restrictive legends within three
trading days upon delivery of such a request by a purchaser, the Company is
required to pay to the purchaser, for each $1,000 of shares of stock or shares
issuable upon exercise of warrants requested, $10 per trading day for each
trading day beginning five trading days after the delivery of the request,
increasing to $20 per trading day after the first five trading days for which
such damages have begun to accrue, until such certificate is delivered without
restrictive legends.
Other
Acquired Technology
In
April 1999, the Company acquired rights to intellectual property related to
the DEL-1 gene and protein. DEL-1 is a novel extracellular matrix protein
involved in early growth and development of blood vessels and bone that has
been
demonstrated to have potential application in the treatment of certain vascular
diseases by stimulating angiogenesis. The Company was obligated to make payments
to Vanderbilt University upon the achievement of certain milestones, to share
revenue received from sublicensing at a specified rate, and to make royalty
payments on sales of products, if any. As of June 30, 2007, no
revenues have been derived from the license of this technology.
In
January 2007, Valentis entered into an asset purchase agreement with
Medarex, Inc. Pursuant to the agreement, the Company sold to Medarex
certain of Valentis’ technologies related to the Del-1 gene, Del-1 protein and
certain Del-1 antibodies and related obligations and liabilities. As a result,
Valentis is no longer obligated to make any additional payments to Vanderbilt
University related to these technologies.
|
15.
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
For
the
fiscal year ended June 30, 2007, Valentis paid an aggregate of
approximately $229,000 to the law firm of
Latham & Watkins LLP for the provision of legal services. Mr. Alan
C. Mendelson, a former director of Valentis, is a partner of Latham &
Watkins LLP. Mr. Mendelson resigned from the Board of Directors of
Valentis in August 2006.
During
the fiscal year ended June 30, 2007, the spouse of Joseph A. Markey,
Valentis’ former Vice President of Finance and Administration, provided services
to Valentis for which she was paid approximately $74,000.
Valentis
has entered into indemnity agreements with each of its executive officers and
directors which provide, among other things, that Valentis will indemnify such
officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings, which he is or may be made a party
by
reason of his position as a director, officer or other agent of Valentis, and
otherwise to the full extent permitted under Delaware law and Valentis’
Bylaws.
|
16.
|
SUBSEQUENT
EVENTS
|
On
October 5, 2006, Valentis, Inc., a Delaware corporation, entered into an
Agreement and Plan of Merger with Urigen N.A., Inc., a Delaware corporation,
and
Valentis Holdings, Inc., (“Valentis Holdings”) a Delaware corporation and newly
formed wholly-owned subsidiary of Valentis (“ Merger Sub ”), as subsequently
amended. Pursuant to the Merger Agreement, on July 13, 2007, Valentis Holdings
was merged with and into Urigen N.A. with Urigen N.A. surviving as a
wholly-owned subsidiary of Valentis. In connection with the Merger, each Urigen
N.A. stockholder received, in exchange for each share of Urigen N.A. common
stock held by such stockholder immediately prior to the closing of the Merger,
2.2554 shares of Valentis common stock. At the effective time of the Merger,
each share of Urigen N.A. Series B preferred stock was exchanged for 11.277
shares of Valentis common stock. An aggregate of 51,226,679 shares of Valentis
common stock were issued to the Urigen N.A. stockholders.
The
Merger Agreement was approved by the stockholders of Urigen N.A. at a meeting
of
the Urigen N.A.’s stockholders on June 28, 2007. At the meeting, the
Urigen N.A.’s Series A shareholders voted to convert the 4,358,938 outstanding
shares of Series A preferred stock to common stock at a ratio of one to
one. In addition, the Board of Directors of Urigen N.A. agreed
to waive the requirement of approval by the shareholders of Valentis as required
by the Merger Agreement.
From
and
after the Merger, the business of Valentis is principally conducted through
Urigen N.A.
On
July
26, 2007, the Board of Directors authorized the creation of a series of
Preferred Stock of the Company to be named Series B Convertible Preferred
Stock,
consisting of 210 shares, which have the designation, powers, preferences
and
relative other special rights and the qualifications, limitations and
restrictions as set forth in the Certificate of Designation filed on July
31,
2007.
On
July
30, 2007, the Company changed its name to Urigen Pharmaceuticals, Inc. and
began
trading on the OTC Bulletin Board under the stock symbol URGP.
On
July
31, 2007, Urigen Pharmaceuticals, Inc. entered into a Series B Convertible
Preferred Stock Purchase Agreement (the “Purchase Agreement”) with
Platinum-Montaur Life Science, LLC (“Platinum”) for the sale of 210 shares of
its Series B Convertible Preferred Stock, par value $.001 per share, at a
purchase price of $10,000 per share. The Company received aggregate proceeds
of
$1,817,000 net of issuance costs of $283,000.
The
Certificate of Designation, as amended and restated, setting forth the rights
and preferences of the Series B Preferred Stock, provides for the payment of
dividends equal to 5% per annum payable on a quarterly basis. The Company has
the option to pay dividends in shares of common stock if the shares are
registered in an effective registration statement and the payment would not
result in the holder exceeding any ownership limitations. The Series B Preferred
Stock is convertible at maximum price of $0.15 per share, subject to certain
adjustments, other than for increase in the conversion price in connection
with
a reverse stock split by the Company.
The
Series B Preferred Stock also carries a liquidation preference of $10,000 per
share.
84
The
Holders of Series B Preferred stock have no voting rights except that the
Company may not without the consent of a majority of the holders of Series
B
Preferred Stock (i) incur any indebtedness, as defined in the Purchase
Agreement, or authorize, create or issue any shares having rights superior
to
the Series B preferred stock; (ii) amend its Articles of Incorporation or Bylaws
or in anyway alter the rights of the Series B Preferred stock, so as to
materially and adversely affect the rights, preferences and privileges of the
Series B Preferred Stock; (iii) repurchase, redeem or pay dividends on any
securities of the Company that rank junior to the Series B Preferred Stock;
or
(iv) reclassify the Company's outstanding stock.
The
Company also issued to Platinum a Series A Warrant to purchase 14,000,000 shares
of the Company's common stock at $0.18. The warrants have a term of five years,
and expire on August 1, 2012. The warrants provide a cashless exercise feature;
however, the holders of the warrants may make a cashless
exercise commencing twelve months after the original issue date of
August 1, 2007 only if the underlying shares are not covered by an effective
registration statement and the market value of the Company's common stock is
greater than the warrant exercise price.
The
terms
of the Warrant provide that it may not be exercised if such exercise would
result in the holder having beneficial ownership of more than 4.99% of the
Company's outstanding common stock. The Amended and Restated Certificate of
Designation contains a similar limitation and provides further that the Series
B
Preferred Stock may not be converted if such conversion, when aggregated with
other securities held by the holder, will result in such holder's ownership
of
more than 9.99% of the Company's outstanding common stock. Beneficial ownership
is determined in accordance with Section 13(d) of the Securities Exchange Act
of
1934, as amended, and Rule 13d-3 thereunder. These limitations may be waived
upon 61 days notice to the Company.
In
addition to the foregoing:
|
·
|
The
Company agreed that for a period of 3 years after the issuance of
the
Series B Preferred Stock that in the event the Company
enters into a financing, with terms more favorable than those attached
to
the Series B Preferred Stock, then the holders
of the Series B Preferred Stock will be entitled to exchange their
securities for shares issued in the
financing.
|
|
·
|
The
Company agreed to register (i) 120% of the shares issuable upon conversion
of the preferred shares and (ii) the shares issuable
upon exercise of the warrants in a Registration Statement to be filed
with
the SEC within 30 days of the closing and
shall use its best efforts to have the registration statement declared
effective with 90 days, or in the event of a review by
the SEC, within 120 days of the closing. The failure of the Company
to
meet this schedule and other timetables provided in
the registration rights agreement would result in the imposition
of
liquidated damages of 1.5% per month with a maximum
of 18% of the initial investment in the Series B Preferred stock
and
warrants. On September 6, 2007, Platinum extended the time to
file until September 28, 2007 without penalty. On October 3,
2007, Platinum extended the time to file until October 15, 2007,
without
penalty.
|
|
·
|
The
Company granted to Platinum the right to subscribe for an additional
amount of securities to maintain its proportionate
ownership interest in any subsequent financing conducted by the Company
for a period of 3 years from the closing
date.
|
|
·
|
The
Company agreed to take action within 45 days of the closing to amend
its
bylaws to permit adjustments to the conversion
price of the Series B Preferred Stock and the exercise price of the
warrant. The failure of the Company to
meet this timetable will result in the imposition of liquidated damages
of
1.5% per month until the amendment to the
Bylaw is effected. On October 3, 2007 Platinum extended the amendment
deadline to October 17, 2007, without penalty
.
|
|
|
17.
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
|
|
Quarter
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
(in thousands, except per share data)
|
||||||||||||||||
|
2007
|
||||||||||||||||
|
Revenue
|
$ |
80
|
$ |
260
|
$ |
231
|
$ |
―
|
||||||||
|
Operating
expenses (excluding restructuring charges of $1,029)
|
2,308
|
1,496
|
921
|
930
|
||||||||||||
|
Net
income (loss)
|
(2,139 | ) | (637 | ) |
80
|
(1,037 | ) | |||||||||
|
Basic
and diluted net income (loss) per share
|
(0.13 | ) | (0.04 | ) |
0.00
|
(0.06 | ) | |||||||||
|
2006
|
||||||||||||||||
|
Revenue
|
$ |
327
|
$ |
146
|
$ |
114
|
$ |
140
|
||||||||
|
Costs
and operating expenses
|
3,967
|
4,119
|
5,014
|
3,208
|
||||||||||||
|
Net
loss
|
(3,589 | ) | (3,901 | ) | (4,850 | ) | (2,997 | ) | ||||||||
|
Basic
and diluted net loss per share
|
(0.24 | ) | (0.26 | ) | (0.32 | ) | (0.17 | ) | ||||||||
85
|
18.
|
UNAUDITED
PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
Subsequent
to the year ended June 30, 2007, Urigen N.A., completed its
merger into Valentis, Inc. on July 13, 2007. In connection
with the merger, Urigen N.A. stockholders received a total of 51,226,679 shares
of Valentis common stock, in exchange for shares of Urigen N.A. common stock
held by such stockholders immediately prior to the closing of the
merger.
Urigen
N.A. security holders owned, immediately after the closing of the merger,
approximately two-thirds of the combined company on a fully-diluted basis.
Further, Urigen N.A. directors constitute a majority of the combined company’s
board of directors and all members of the executive management of the combined
company are from Urigen N.A. Therefore, Urigen N.A. was deemed to be the
acquiring company for accounting purposes and the merger transaction will be
accounted for as a reverse merger and a recapitalization. The financial
statements of the combined entity after the merger will reflect the historical
results of Urigen N.A. prior to the merger and will not include the historical
financial results of Valentis prior to the completion of the merger.
Stockholders’ equity and earnings per share of the combined entity after the
merger will be retroactively restated to reflect the number of shares of common
stock received by Urigen N.A. security holders in the merger, after giving
effect to the difference between the par values of the capital stock of Urigen
N.A. and Valentis, with the offset to additional paid-in capital.
The
following unaudited pro forma combined condensed consolidated financial
statements have been prepared to give effect to the merger of Urigen N.A. and
Valentis as a reverse acquisition of assets and a recapitalization in accordance
with accounting principles generally accepted in the United States. For
accounting purposes, Urigen N.A. is considered to be acquiring Valentis in
the
merger and Valentis does not meet the definition of a business in accordance
with Statement of Financial Accounting Standards, SFAS
No. 141, Business Combinations (“SFAS No. 141”) , and Emerging
Issue Task Force 98-3 (“EITF 98-3”), Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business
,
because Valentis had no material assets or liabilities at the time of closing
of
the merger and these assets and liabilities do not constitute a business
pursuant to SFAS No. 141 and EITF 98-3. Consequently, all of the assets and
liabilities of Valentis have been reflected in the pro forma financial
statements at their respective fair values and no goodwill or other intangibles
will be recorded as part of acquisition accounting and the cost of the merger
is
measured at net assets acquired.
The
unaudited pro forma combined condensed consolidated financial statements
presented below are based on the historical financial statements of Urigen
N.A.
and Valentis, adjusted to give effect to the acquisition of Valentis by Urigen
N.A. for accounting purposes.
The
unaudited pro forma combined condensed consolidated balance sheet assumes that
the Merger was completed as of June 30, 2007. The unaudited pro forma
combined condensed consolidated statement of operations for the year ended
June 30, 2007 assumes that the merger was completed as of
July 1, 2005.
The
unaudited pro forma combined condensed consolidated financial information is
presented for illustrative purposes only and is not necessarily indicative
of
the financial position or results of operations that would have actually been
reported had the merger occurred at the dates stated above, nor is it
necessarily indicative of future financial position or results of operations.
The unaudited pro forma combined condensed consolidated financial information
has been derived from and should be read in conjunction with the historical
consolidated financial statements and related notes of Urigen N.A. and
Valentis.
86
Unaudited
Pro Forma Combined Condensed Consolidated Balance Sheet
(in
thousands)
|
As
of June 30, 2007
|
||||
|
ASSETS
|
||||
|
Current
assets:
|
||||
|
Cash
and cash equivalents
|
$ |
585
|
||
|
Prepaid
expenses and other current assets
|
239
|
|||
|
Total
current assets
|
824
|
|||
|
Property
and equipment, net
|
10
|
|||
|
Intangible
Assets, net
|
259
|
|||
|
Total
assets
|
$ |
1,093
|
||
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
||||
|
Current
liabilities:
|
||||
|
Accounts
payable
|
$ |
925
|
||
|
Other
accrued liabilities
|
960
|
|||
|
Notes
payable
|
476
|
|||
|
Total
current liabilities
|
2,361
|
|||
|
Stockholders’
deficit:
|
||||
|
Common
stock
|
68
|
|||
|
Additional
paid-in capital
|
3,429
|
|||
|
Accumulated
other comprehensive loss
|
20
|
|||
|
Accumulated
deficit
|
(4,785 | ) | ||
|
Total
stockholders’ deficit
|
(1,268 | ) | ||
|
Total
liabilities and stockholders’ deficit
|
$ |
1,093
|
||
Unaudited
Pro Forma Combined Condensed Consolidated Statement of
Operations
(in
thousands, except per share amounts)
|
Year
ended June 30, 2007
|
||||
|
Operating
expenses:
|
||||
|
Research
and development
|
$ |
729
|
||
|
General
and administrative
|
2,846
|
|||
|
Sale
and marketing
|
296
|
|||
|
Total
operating expenses
|
3,871
|
|||
|
Loss
from operations
|
(3,871 | ) | ||
|
Interest
income
|
53
|
|||
|
Other
income and expense, net
|
(36 | ) | ||
|
Net
loss
|
$ | (3,854 | ) | |
|
Basic
and diluted net loss per common share
|
$ | (0.06 | ) | |
|
Shares
used in computing basic and diluted net loss per common
share
|
68,279
|
|||
87