-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UMS6hkAjTTi+gm5F1Fm3vQtaXm81ZT/TrONnyFHZROnFUfnru5QRynpGf+Yuo/Ts v1aTpIQFAnuv7IDqMEYb8g== 0000912057-00-006624.txt : 20000215 0000912057-00-006624.hdr.sgml : 20000215 ACCESSION NUMBER: 0000912057-00-006624 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALENTIS INC CENTRAL INDEX KEY: 0000932352 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 943156660 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22987 FILM NUMBER: 542173 BUSINESS ADDRESS: STREET 1: 863A MITTEN RD CITY: BURLINGAME STATE: CA ZIP: 94010 BUSINESS PHONE: 6506971900 MAIL ADDRESS: STREET 1: 863A MITTEN ROAD CITY: BURLINGAME STATE: CA ZIP: 94010 FORMER COMPANY: FORMER CONFORMED NAME: MEGABIOS CORP DATE OF NAME CHANGE: 19960716 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q X Quarterly report pursuant to Section 13 or 15(d) of the Securities - --------- Exchange Act of 1934. For the quarterly period ended December 31, 1999. Transition report pursuant to Section 13 or 15(d) of the Securities - --------- Exchange Act of 1934. For the transition period from to ----------- ----------- Commission File Number 0-22987 ------- VALENTIS, INC. (Exact name of registrant as specified in its charter) Delaware 94-3156660 - --------------------------------------------- --------------------------------- (State or other jurisdiction of incorporation (IRS Employer Identification No.) or organization) 863A Mitten Rd., Burlingame, CA 94010 - --------------------------------------------- --------------------------------- (Address of principal offices) (Zip Code) 650-697-1900 ----------------------------------------------------- (Registrant's telephone number including area code) 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 ---------- ---------- The number of outstanding shares of the registrant's Common Stock, $.001 par value, was 26,745,618 as of January 31, 2000. Page 1 of 18 VALENTIS, INC. INDEX
PART I: FINANCIAL INFORMATION Page ---- ITEM 1: FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 PART II: OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS 16 ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 16 ITEM 3: DEFAULTS UPON SENIOR SECURITIES 16 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 5: OTHER INFORMATION 16 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 16 Signatures 17 Exhibit Index 18
Page 2 of 18 PART 1 FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS VALENTIS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
DECEMBER 31, JUNE 30, 1999 1999 ---- ---- (unaudited) (Note 1) ASSETS Current assets: Cash and cash equivalents $ 8,472 $ 4,785 Short-term investments 19,703 19,522 Note receivable from PolyMASC Pharmaceuticals - 1,000 Other receivables 577 1,800 Prepaid expenses and other 927 1,392 ------ ------ Total current assets 29,679 28,499 Property and equipment, net 11,066 11,897 Long-term investments - 14,830 Goodwill and other intangible assets 12,938 9,012 Other assets 189 189 ------ ------ $ 53,872 $ 64,427 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,551 $ 3,691 Other accrued liabilities 957 1,309 Deferred revenue 5,893 4,914 Current portion of long-term debt 3,206 3,124 ------ ------ Total current liabilities 12,607 13,038 Long-term debt 4,227 5,459 Commitments Stockholders' equity: Common stock 26 22 Additional paid-in capital 139,546 119,746 Deferred compensation, net of amortization (318) (463) Accumulated other comprehensive loss (48) (109) Accumulated deficit (102,168) (73,266) ------ ------ Total stockholders' equity 37,038 45,930 ------ ------ $ 53,872 $ 64,427 ====== ======
See accompanying notes Page 3 of 18 VALENTIS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- (unaudited) (unaudited) Collaborative research and development revenue $ 2,150 $ 613 $ 3,238 $ 1,386 Research and development grant revenue 167 -- 264 -- ----- ----- ----- ----- Total revenue 2,317 613 3,502 1,386 Operating expenses: Research and development 7,087 3,357 12,574 6,786 General and administrative 1,822 1,018 3,641 2,094 Acquired in-process research and development -- -- 14,347 -- Amortization of goodwill and other acquired intangibles 1,499 -- 2,334 -- ------ ----- ------ ----- Total operating expenses 10,408 4,375 32,896 8,880 ------ ----- ------ ----- Loss from operations (8,091) (3,762) (29,394) (7,494) Interest income 426 622 944 1,301 Interest expense and other (207) (198) (452) (344) ---- ---- ---- ---- Net loss $ (7,872) $ (3,338) $(28,902) $ (6,537) ======== ======== ======== ======== Basic and diluted net loss per share $ (0.30) $ (0.26) $ (1.16) $ (0.51) ======== ======== ======== ======== Shares used in computing basic and diluted net loss per share 26,363 12,798 24,987 12,767 ======== ======== ======== ========
See accompanying notes Page 4 of 18 VALENTIS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
SIX MONTHS ENDED DECEMBER 31, ------------ 1999 1998 ---- ---- (unaudited) (unaudited) Cash flows from operating activities Net loss $(28,902) $ (6,537) Adjustments to reconcile net loss to net cash used in operations: Depreciation 1,957 1,217 Amortization 2,334 -- Amortization of deferred compensation 113 295 Purchase of in-process research and development with common stock 14,347 -- Changes in operating assets and liabilities: Other receivables 1,231 (334) Prepaid expenses and other 525 (205) Deferred revenue 979 109 Accounts payable (2,252) (593) Accrued liabilities (352) 447 ------ ----- Net cash used in operating activities (10,020) (5,601) Cash flows from investing activities Net cash acquired in acquisition 422 -- Purchase of property and equipment (621) (4,564) Deposits and other assets -- (15) Purchase of available-for-sale investments -- (3,035) Maturities of available-for-sale investments 14,649 5,070 ------ ----- Net cash provided by (used in) investing activities 14,450 (2,544) Cash flows from financing activities Proceeds from issuance of long-term debt 367 4,590 Payments on long-term debt (1,517) (622) Proceeds from issuance of common stock, net of repurchases 407 91 --- -- Net cash provided by financing activities (743) 4,059 ---- ----- Net increase (decrease) in cash and cash equivalents 3,687 (4,086) Cash and cash equivalents, beginning of period 4,785 15,172 -------- -------- Cash and cash equivalents, end of period $ 8,472 $ 11,086 ======== ======== Supplemental disclosure of cash flow information: Interest paid $ 410 $ 327 Schedule of non-cash transactions: Construction in progress included in accrued liabilities (126) $ (547) Tangible and intangible assets acquired for shares of common stock, net of cash acquired and liabilities assumed $ 5,334 $ --
See accompanying notes Page 5 of 18 VALENTIS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements are unaudited and have been prepared by Valentis, Inc. ("Valentis" or the "Company") in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company's annual financial statements as required by generally accepted accounting principles have been condensed or omitted. The interim financial statements, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the results for the interim periods ended December 31, 1999 and 1998. The balance sheet at June 30, 1999 is derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The results of operations for the three and six months ended December 31, 1999 are not necessarily indicative of the results of operations to be expected for the fiscal year, although the Company expects to incur a substantial loss for the year ended June 30, 2000. These interim financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 1999, which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. On March 18, 1999, the Company completed its merger with GeneMedicine, Inc. ("GeneMedicine"). On August 27, 1999, the Company acquired all the outstanding shares of PolyMASC Pharmaceuticals plc ("PolyMASC"). Both transactions were accounted for under the purchase method of accounting. The accompanying condensed consolidated financial statements reflect the revenues and expenses of PolyMASC and GeneMedicine from their acquisition dates and include the accounts of the Company and its wholly owned subsidiary, PolyMASC. All significant intercompany balances and transactions have been eliminated. 2. REVENUE RECOGNITION Revenue related to collaborative research agreements with the Company's corporate partners is recognized over the related funding periods for each contract. The Company is required to perform research and development activities as specified in each respective agreement on a best-efforts basis. For some contracts, the Company is reimbursed based on the costs associated with the number of full time equivalent employees working on each specific contract over the term of the agreement. Research and development expenses under the collaborative research agreements approximate or exceed the revenue recognized under such agreements over the term of the respective agreements. Deferred revenue results when the Company does not incur the required level of effort during a specific period in comparison to funds received under the respective contracts, or if additional work may be required to satisfy a contract obligation. In addition, as a result of the GeneMedicine merger, deferred revenue at December 31, 1999 includes an obligation related to a research agreement with Roche Holdings Ltd. ("Roche"). Pursuant to the terms of the Roche agreement, the Company may be obligated to conduct research and development at its own expense in an amount not to exceed $5 million at the end of the agreement. The Company has, therefore, deferred a portion of research funding received from Roche under this agreement to provide for this obligation. Milestone payments, if any, will be recognized pursuant to collaborative agreements upon the achievement of specified milestones, such as the filing of Investigational New Drug Applications, commencement of clinical trials or receipt of regulatory approvals. Page 6 of 18 3. NET LOSS PER SHARE The Company applies the provisions of Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128"), which requires the presentation of basic earnings (loss) per share and diluted earnings (loss) per share, if dilutive. Basic earnings per share is computed by dividing income or loss applicable to common stockholders by the weighted-average number of common shares outstanding for the period, net of certain common shares outstanding which are subject to continued vesting and the Company's right of repurchase. Basic earnings per share exclude any dilutive effects of options, warrants and convertible securities. Diluted net loss per share has not been presented separately as, given the Company's net loss position, the results would be anti-dilutive. The following have been excluded from the calculation of net loss per share because the effect of inclusion would be antidilutive: 28,660 common shares which are outstanding but are subject to the Company's right of repurchase which expires ratably over 4 years; options to purchase 2,811,545 shares of common stock at a weighted average price of $6.63 per share and warrants to purchase 62,378 shares of common stock at a weighted average exercise price of $3.88 per share. Options and warrants will be included in the calculation of diluted earnings per share at such time as the effect is no longer antidilutive, as calculated using the treasury stock method. The repurchasable shares will be included in the calculations as the repurchase rights lapse. A reconciliation of shares used in the calculation of basic and diluted net loss per share follows (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1999 1998 1999 1998 ---- ---- ---- ---- Net loss $ (7,872) $ (3,338) $(28,902) $ (6,537) ====== ====== ======= ====== BASIC AND DILUTED Weighted average shares of common stock outstanding 26,398 12,899 25,029 12,908 Common shares subject to repurchase (35) (101) (42) (141) ------ ------ ------- ------ Weighted average shares of common stock used in computing net loss per share 26,363 12,798 24,987 12,767 ====== ====== ======= ====== Basic and diluted net loss per share $ (0.30) $ (0.26) $ (1.16) $ (0.51) ===== ===== ===== ====
4. ACQUISITION OF POLYMASC PHARMACEUTICALS PLC ("POLYMASC") On August 27, 1999, Valentis acquired PolyMASC Pharmaceuticals plc ("PolyMASC"). Under the terms of the acquisition agreement, each outstanding share of PolyMASC common stock was exchanged, at a fixed exchange ratio of 0.209, for newly issued shares of common stock of Valentis. This resulted in the issuance of approximately 4.2 million Valentis shares, valued at about $19.3 million based on an average Valentis stock price of $4.56 at the date the transaction was announced. Dr. Gillian E. Francis, Chief Executive Officer of PolyMASC, has joined the Board of Directors of Valentis and is serving as Managing Director, PolyMASC. The Company is managing PolyMASC as a wholly owned subsidiary of Valentis. The acquisition was accounted for as a purchase. Page 7 of 18 The total cost of the merger was approximately $20.1 million, determined as follows (in thousands): Fair value of Valentis Common Stock (based on the per share fair value at the date the agreement was announced) $ 19,266 Valentis transaction costs 837 -------- $ 20,103 ========
Based on a valuation of tangible and intangible assets and liabilities assumed, Valentis has allocated the total cost of the acquisition to the net assets of PolyMASC as follows (in thousands): Tangible assets acquired $ 1,600 In-process research and development 14,347 Intangible assets - assembled workforce and goodwill 6,261 Liabilities assumed (including PolyMASC transaction costs) (2,105) -------- $ 20,103 ========
PolyMASC's research and development programs are in various stages of preclinical development. Currently, none of the products utilizing PolyMASC's proprietary technology has as yet entered any stage of human clinical testing or has been approved for marketing. PolyMASC's strategy has been to develop and commercialize its products through alliances with pharmaceutical and biotechnology companies. A valuation of the purchased assets was undertaken to assist the Company in determining the fair value of each identifiable intangible asset and in allocating the purchase price among the acquired assets, including the portion of the purchase price attributed to in-process research and development projects. Standard valuation procedures and techniques were utilized in determining the fair value of the acquired in-process research and development. To determine the value of the technology in the development stage, the Company considered, among other factors, the stage of development of each project, the time and resources needed to complete each project, expected income and associated risks. Associated risks included the inherent difficulties and uncertainties in completing the project and thereby achieving technological feasibility, and the risks related to the viability of and potential changes to future target markets. The analysis resulted in $14.3 million of the purchase price being charged to in-process research and development. The intangible assets, consisting of assembled workforce and goodwill, were assigned a value of $6.3 million and will be amortized over their estimated useful lives of three years. The acquired in-process research and development was included in the Valentis Statement of Operations for the quarter ended September 30, 1999. The unaudited pro forma information for the Company for the six months ended December 31, 1999 and 1998, had the acquisition occurred at the beginning of each fiscal year is as follows (in thousands except per share amounts): Six months ended December 31, 1999 1998 ---- ---- Net revenue $ 3,505 $ 2,138 Net loss $(15,072) $(7,708) Net loss per share $ (0.57) $ (0.46) ====== ===== Page 8 of 18 The unaudited pro forma combined results for the six months ended December 31, 1999 and 1998 exclude the effect of the write-off of acquired in-process research and development of $14.3 million, as such amount is non-recurring. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been completed at the beginning of the period indicated, nor is it necessarily indicative of future operating results. 5. COMPREHENSIVE INCOME (LOSS) Following are the components of comprehensive loss (in thousands):
Three Months Ended Six Months Ended December December 31, 31, 1999 1998 1999 1998 ---- ---- ---- ---- Net loss $ (7,872) $ (3,338) $(28,902) $ (6,537) Net unrealized gain (loss) on available-for-sale securities 4 (43) 17 100 Net unrealized foreign exchange translation adjustment 12 -- 44 -- ------ ------ ------- ------ Comprehensive loss $ (7,856) $ (3,381) $(28,841) $ (6,437) ====== ====== ======= ======
The components of accumulated other comprehensive loss are as follows (in thousands):
December 31, 1999 June 30, 1999 ----------------- ------------- Unrealized gain (loss) on available for sale investments $ (92) $(109) Foreign currency translation adjustments 44 -- --- ---- Accumulated other comprehensive loss $ (48) $(109) === ====
Page 9 of 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 1999, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. OVERVIEW The Company develops proprietary technologies and applies its preclinical and early clinical development expertise to create novel therapeutics. The Company's core technologies include multiple gene delivery and gene expression systems and PEGylation technologies designed to improve the safety, efficacy and dosing characteristics of genes, proteins, peptides, peptidomimetics (peptide-like small molecules), antibodies and replicating and non-replicating viruses. These technologies are covered by a broad patent portfolio that includes issued U.S. and European claims. This expanded portfolio of delivery technologies allows Valentis to maintain its focus on creating improved versions of currently marketed products as well as solving safety, efficacy and compliance issues with biologics in development. Valentis' commercial strategy is to enter into corporate collaborations for full-scale clinical development and marketing and sales of products. Valentis itself, or through its PolyMASC subsidiary, currently has corporate collaborations with: - Roche Holdings Ltd. ("Roche") for cancer immunotherapeutics, - Eli Lilly & Co. ("Lilly") to develop treatments for breast and ovarian cancer using the BRCA1 gene, - Glaxo Wellcome plc ("Glaxo Wellcome") to develop a treatment for cystic fibrosis using the CFTR gene, - Boehringer Ingelheim ("BI") to develop treatments for rheumatoid arthritis, - Heska Corporation ("Heska") for the development of gene medicines for animal health, - Transkaryotic Therapies Inc. for PEGylation of certain proteins, - Onyx Pharmaceuticals Inc. for a PEGylated virus-based cancer therapeutic, - Bayer Corporation for a PEGylated Factor VIII, and - DSM Biologics and Qiagen N.V. for plasmid manufacturing. To date, substantially all revenue has been generated by collaborative research and development agreements from corporate partners, and no revenue has been generated from product sales. Under the terms of its corporate collaborations, the Company generally receives research and development funding on a quarterly basis in advance of associated research and development costs. The Company expects that future revenue will be derived in the short-term from research and development agreements and milestone payments and in the long-term from royalties on product sales. The Company is conducting operations in California, Texas and London. The Company has incurred significant losses since inception and expects to incur substantial losses for the foreseeable future, primarily due to the expansion of its research and development programs and because the Company does not expect to generate revenue from the sale of products in the foreseeable future, if at all. The Company expects that operating results will fluctuate from quarter to quarter and that such fluctuations may be substantial. The Company expects to increase both research and administrative expenditures in future periods. As of December 31, 1999, the Company's accumulated deficit was approximately $102.2 million. BUSINESS ACQUISITIONS Page 10 of 18 On August 27, 1999, Valentis acquired PolyMASC Pharmaceuticals plc ("PolyMASC"). Under the terms of the acquisition agreement, each outstanding ordinary share of PolyMASC was exchanged, at a fixed exchange ratio of 0.209, for newly issued shares of common stock of Valentis. This resulted in the issuance of approximately 4.2 million Valentis shares valued at about $19.3 million based on an average Valentis stock price of $4.56 at the date the transaction was announced. The purchase price also included approximately $837,000 of transaction costs, for an aggregate purchase price of $20.1 million. Dr. Gillian E. Francis, Chief Executive Officer of PolyMASC, has joined the Board of Directors of Valentis and is serving as Managing Director of PolyMASC. The Company is managing PolyMASC as a wholly owned subsidiary of Valentis. The acquisition was accounted for as a purchase. PolyMASC's research and development programs are in various stages of preclinical development. Currently, none of the products utilizing PolyMASC's proprietary technology has as yet entered any stage of human clinical testing or has been approved for marketing. PolyMASC's strategy has been to develop and commercialize its products through alliances with pharmaceutical and biotechnology companies. A valuation of the purchased assets was undertaken to assist the Company in determining the fair value of each identifiable intangible asset and in allocating the purchase price among the acquired assets, including the portion of the purchase price attributed to in-process research and development projects. Standard valuation procedures and techniques were utilized in determining the fair value of the acquired in-process research and development. To determine the value of the technology in the development stage, the Company considered, among other factors, the stage of development of each project, the time and resources needed to complete each project, expected income and associated risks. Associated risks included the inherent difficulties and uncertainties in completing the project and thereby achieving technological feasibility, and the risks related to the viability of and potential changes to future target markets. The analysis resulted in $14.3 million of the purchase price being charged to in-process research and development. The intangible assets, consisting of assembled workforce and goodwill, were assigned a value of $6.3 million and will be amortized over their estimated useful lives of three years. The acquired in-process research and development was included in the Valentis Condensed Consolidated Statements of Operations for the quarter ended September 30, 1999. With the acquisition of London-based PolyMASC, Valentis expanded its delivery technologies and has a more diversified portfolio of products in clinical and preclinical development. The acquisition broadened Valentis' intellectual property portfolio in biologics delivery, creating what it believes is the first company offering a broad array of technologies and intellectual property in biologics delivery. PolyMASC will continue to focus primarily on research and preclinical development of PEGylation technologies and products. PEGylation is an established technology that involves the attachment of the polymer polyethyleneglycol ("PEG") to therapeutics to alter their pharmacokinetics (distribution in the body, metabolism and excretion). The alteration of the pharmacokinetics of biologics due to PEGylation may lead to improved dosing intervals and may also have beneficial effects on safety and efficacy. On March 18, 1999, Megabios Corp. completed its merger with GeneMedicine, Inc. ("GeneMedicine"). On April 29, 1999, the combined company was renamed Valentis, Inc. ("the Company"). Each outstanding share of GeneMedicine common stock was converted into 0.571 of a share of the common stock of the Company. The merger resulted in the issuance of approximately 9.1 million shares of the Company's common stock, valued at $38.7 million. The purchase price also included approximately $850,000 related to outstanding GeneMedicine stock options and outstanding warrants assumed by the Company and $1.7 million of transaction costs, for an aggregate purchase price of $41.3 million. The merger transaction was accounted for as a purchase. A write-off of $25.9 million for in-process research and development acquired from GeneMedicine was included in the Company's Condensed Consolidated Statement of Operations (see detailed discussion under "Acquisition of GeneMedicine Research and Development Programs" below). The intangible assets acquired are being amortized over their estimated useful lives of 3 years. Page 11 of 18 RESULTS OF OPERATIONS The Company's research and development revenue for the three months ended December 31, 1999 totaled approximately $2.3 million compared to $613,000 for the corresponding period of 1998. Research and development revenue for the six months ended December 31, 1999 totaled approximately $3.5 million compared to $1.4 million for the corresponding period of 1998. The 1999 revenue for the quarter was attributable to amounts earned for milestone achievements and for collaborative research and development performed under the Company's corporate collaborations with Roche, Lilly and Boehringer Ingelheim of approximately $1.7 million, $20,000 and $213,000, respectively, and $384,000 earned under other agreements. The 1998 revenue was attributable primarily to amounts earned for research and development performed under the Company's corporate collaboration with Lilly. No revenue from royalties from product sales has been earned under any corporate collaboration to date. Research and development expenses increased to $7.1 million and $12.6 million for the quarter and six months ended December 31, 1999, respectively, from $3.4 million and $6.8 million in the corresponding periods of 1998. The increases in 1999 were primarily attributable to the addition of staff, facilities and projects resulting from the acquisition of PolyMASC in August 1999 and the merger with GeneMedicine in March 1999. The Company expects research and development expenses to increase as the Company continues to expand its independent and collaborative research and development programs. General and administrative expenses for the quarter and six months ended December 31, 1999 increased to $1.8 million and $3.6 million, respectively, from $1.0 million and $2.1 million in the corresponding periods of 1998. The increases in 1999 compared to 1998 were primarily due to the addition of staff, facilities and projects resulting from the acquisition of PolyMASC in August 1999 and the merger with GeneMedicine in March 1999. The Company expects general and administrative expenses to increase due to business development activities and to support expanded research and development activities. Interest income (expense), net was $219,000 for the quarter ended December 31, 1999 compared to $424,000 for the corresponding quarter of the prior year. For the six months ended December 31, 1999, interest income (expense), net was $492,000 compared to $957,000 for the corresponding period of the prior year. The decrease in interest income (expense), net resulted primarily from increased interest expenses on outstanding balances on the Company's equipment financing lines of credit and a decrease in interest income resulting from lower average cash, cash equivalent and short term investment balances. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1999, the Company had $28.2 million in cash, cash equivalents and investments compared to $39.1 million at June 30, 1999. Net cash used in the Company's operations for the six months ended December 31, 1999 was $10.0 million compared to $5.6 million in the corresponding period of 1998. Cash was used primarily to fund increasing levels of research and development and general and administrative activities. The Company's capital expenditures were $621,000 for the six months ended December 31, 1999 compared to $4.6 million used in the corresponding quarter of 1998. In May 1996, the Company entered into an equipment financing agreement for up to $2,700,000 with a financing company. The Company financed the entire $2,700,000 in equipment purchases under this agreement structured as loans. The equipment loans are being repaid over 48 months at interest rates ranging from 15.2% to 16.2% and are secured by the related equipment. As of December 31, 1999, the outstanding balance under this financing agreement was $1.4 million. In June 1998, the Company established a line of credit for $8,000,000 with a commercial bank, which was subsequently fully utilized. In accordance with the terms of the agreement, the entire balance was converted into term loans at interest rates ranging from 8.25% to 9.0% due in equal monthly installments. The loans are secured Page 12 of 18 by tangible personal property, other than the assets securing the equipment financing, accounts receivable and funds on deposit. As a condition of the credit line, the Company must maintain a minimum cash and short-term investments balance of not less than the greater of the prior two quarters net cash usage or 90% of the total principal drawn under the line of credit. As of December 31, 1999, the outstanding balance under this financing agreement was $5.7 million. In October 1998, the Company entered into an equipment financing agreement for up to $2,500,000 with a financing company. The Company financed $366,000 in equipment purchases under this agreement structured as loans. The equipment loans are being repaid over 43 months at interest rates 10.10% and are secured by the related equipment. As of December 31, 1999, the outstanding balance under this financing agreement was $351,000. The Company anticipates that its cash and cash equivalents, committed funding from existing corporate collaborations and projected interest income, will enable the Company to maintain its current and planned operations at least through June 2001. However, the Company may require additional funding prior to such time. The Company's future capital requirements will depend on many factors, including scientific progress in its research and development programs, the size and complexity of such programs, the scope and results of preclinical studies and clinical trials, the ability of the Company to establish and maintain corporate collaborations, the time and costs involved in obtaining regulatory approvals, the time and costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, the cost of manufacturing preclinical and clinical materials and other factors not within the Company's control. The Company is seeking additional collaborative agreements with corporate partners and may seek additional funding through public or private equity or debt financing. The Company may not be able to enter into any such agreements, however, or if entered into, any such agreements may not reduce the Company's funding requirements. The Company expects that additional equity or debt financing may be required to fund its operations. Additional financing to meet the Company's funding requirements may not be available on acceptable terms or at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. Insufficient funds may require the Company to delay, scale back or eliminate some or all of its research or development programs or to relinquish greater or all rights to products at an earlier stage of development or on less favorable terms than the Company would otherwise seek to obtain, which could materially adversely affect the Company's business, financial condition and results of operations. ACQUISITION OF GENEMEDICINE RESEARCH AND DEVELOPMENT PROGRAMS There are seven primary GeneMedicine research and development programs that the Company acquired in March 1999. Prior to the merger of GeneMedicine with Megabios in March 1999, over the previous five years, GeneMedicine, Inc. incurred approximately $50 million of research and development expenses in the development of its current research and development programs. Costs to complete these projects could aggregate to approximately $65 million over the next five to seven years. In determining its research and development priorities, the Company has decided to delay additional work on three of the programs acquired in the merger with GeneMedicine. Work on any of the growth factor gene medicines (IGF-1), pulmonary gene medicines (AAT GM) and the nucleic acid programs (APC) will not be pursued unless or until a corporate partner is found to provide funding for further development. The Company presently anticipates that gene medicines (which utilize its proprietary developmental-stage technologies) will obtain FDA approval beginning at various times beginning in 2005 through 2008. If such gene medicines are successfully completed, the Company will receive a royalty on the product sales. Page 13 of 18 The nature of the efforts required for developing the acquired in-process research and development into technologically feasible and commercially viable products principally relate to the successful performance of additional preclinical studies and clinical trials. Though the Company expects that some of the acquired in-process technology will be successfully developed, there can be no assurance that commercial or technical viability of these products will be achieved. While the expectations and promise of gene therapy are great, clinical efficacy has not yet been demonstrated. Many approaches to gene therapy are being pursued by pharmaceutical and biotechnology companies, but there are currently no marketed gene therapy products and none are expected for the next several years. ACQUISITION OF POLYMASC RESEARCH AND DEVELOPMENT PROGRAM PEGylation is the primary PolyMASC research and development program that the Company acquired in August 1999. The Company's management is primarily responsible for estimating the fair value of the purchased in-process research and development. The program has been valued based on a discounted probable future cash flow analysis using a discount rate of 40%, which management believes adequately reflects the substantial risk of biologics delivery research and development. In the valuation model, it is assumed that for product candidates based on PolyMASC's technology, preclinical studies and clinical trials are successfully completed, regulatory approval to market the product candidates is obtained, a marketing partner is secured and the Company is able to manufacture the product in commercial quantities. Each of these activities is subject to significant risks and uncertainties. The PEGylation technology that the Company acquired was valued at $14.3 million. The Company currently has corporate collaborations with Onyx Pharmaceuticals, Transkaryotic Technologies and Bayer Pharmaceuticals under which it is developing product candidates using its PEGylation technology. Before a product can be successfully marketed, the Company's corporate partners must fund the completion of preclinical studies, clinical studies and, if successfully completed, the market introduction of the new PEGylated therapies. Product efficacy and dose responsiveness must be proven in Phase II and Phase III human clinical trials and FDA approval is required before market introduction. The Company currently estimates that clinical development activities could be completed and revenues could begin to accrue to the Company with the projected introduction of a product in 2002. Management estimates that the remaining research and development efforts will total more than $8 million over the next six years. IMPACT OF THE YEAR 2000 An issue faced by all industries was the Year 2000 ("Y2K") computer issue. As of January 31, 2000, no Y2K issues arose that negatively impacted the Company's operations. The financial impact of the required upgrades and conversion of computer software relating to the Y2K issue was funded through operating cash flows and was less than $20,000. All costs were expensed as incurred. However, costs incurred do not take into account the costs, if any, that might be incurred as a result of Y2K-related failures that occur despite the Company's implementation of its Y2K plan. Although the Company has not experienced any material operational issues associated with preparing its internal systems for the Year 2000, or material issues with respect to the adequacy of third party systems, the Company could still experience unanticipated material negative consequences and/or material costs caused by undetected errors or defects in such systems. The impact of such consequences could have a material adverse effect on the Company's business, financial condition or results of operations FINANCIAL MARKET RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio and long-term debt obligations. The Company maintains a strict investment policy that ensures the safety and preservation of its invested funds by limiting default risk, market risk, and reinvestment Page 14 of 18 risk. The Company's 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 by year of maturity for the Company's investment portfolio and long-term debt obligations (in thousands, except percentages).
2000 Total --------------- ----------------- Cash equivalents Fixed rate .......................... $ 7,918 $ 7,918 Average rate ........................ 5.58% 5.58% Short-term investments Fixed rate .......................... $ 19,703 $ 19,703 Average rate ........................ 5.28% 5.28% Total investment securities ............ $ 27,621 $ 27,621 Average rate ........................... 5.36% 5.36%
Page 15 of 18 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ----------------- None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ----------------------------------------- None ITEM 3. DEFAULTS UPON SENIOR SECURITIES ------------------------------- None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- On December 7, 1999, in connection with the Company's Annual Meeting of Stockholders, the following proposals were voted on as follows: PROPOSAL 1: Election of Directors. PROPOSAL 2: Ratification of Ernst & Young LLP as the Company's independent auditors. The voting of stockholders with respect to each of the foregoing proposals was as follows:
Votes Votes Votes For Against Abstained --- ------- --------- Election as Director: Stanley T. Crooke, MD. Ph.D. 17,508,414 33,348 0 Patrick G. Enright 17,507,371 34,391 0 Gillian E. Francis, M.B., D.Sc.(Med), FRC(Path) 17,507,471 34,291 0 Proposal 2 17,520,275 6,825 14,662
ITEM 5. Other Information ----------------- None ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- a. Exhibits 27 Financial Data Schedule (Exhibit 27 is submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q submitted to the Securities and Exchange Commission). b. Reports on Form 8-K On November 9, 1999, the Registrant filed a current report on Form 8-K to report (i) that it had restructured the Company to improve the efficiency of product development and enhance the Company's capability for clinical development, and (ii) that Rodney Pearlman Ph.D. resigned from his position as the Company's Senior Vice President, Research and Development effective on January 3, 2000. On November 9, 1999, the Registrant filed an amendment to a current report on Form 8-K to report unaudited condensed combined financial statements and unaudited pro forma financial information relating to its acquisition of PolyMASC Pharmaceuticals plc. Page 16 of 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Valentis, Inc. -------------- (registrant) Date: February 11, 2000 /s/ Benjamin F. McGraw III -------------------------- Benjamin F. McGraw III President, Chief Executive Officer, and Chairman of the Board of Directors Date: February 11, 2000 /s/ Bennet Weintraub -------------------- Bennet Weintraub Chief Financial Officer and Vice President Finance (Principal Financial and Accounting Officer) Page 17 of 18 VALENTIS INC. EXHIBIT INDEX 27 Financial Data Schedule (Exhibit 27 is submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q submitted to the Securities and Exchange Commission). Page 18 of 18 EX-27 2 EXHIBIT 27
5 1,000 6-MOS JUN-30-2000 JUN-30-1999 DEC-31-1999 8,472 19,703 577 0 0 29,679 21,044 9,978 53,872 12,756 0 0 0 139,572 (102,534) 0 3,502 3,502 0 0 32,896 0 386 0 67 (28,902) 0 0 0 (28,902) (1.16) (1.16)
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