Page
Prospectus Summary	1
Selected Financial Data	2
Risk Factors	4
Use of Proceeds	15
Forward-Looking Statements	15
Selling Stockholder	15
Plan of Distribution	20
Market for Common Equity and Related Stockholder Matters	21
Description of Business	21
Management’s Discussion and Analysis or Plan of Operation	34
Description of Property	42
Legal Proceedings	42
Management	42
Executive Compensation	46
Certain Relationships and Related Transactions	48
Security Ownership of Certain Beneficial Owners and Management	48
Description of Securities	50
Indemnification for Securities Act Liabilities	51
Legal Matters	52
Experts	52
Changes in Accountants	52
Additional Information	52
Financial Statements	53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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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a product candidate may not be deemed to be safe or effective;

 

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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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the manufacturing processes or facilities may not meet the applicable requirements; and

 

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changes in their approval policies or adoption of new regulations may require additional clinical trials or other data.

 

 

 

 

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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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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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Our financial condition;

 

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timing and outcome of the Phase II clinical trials for URG101;

 

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developments related to our collaboration agreements, license agreements, academic licenses and other material agreements;

 

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our ability to establish and maintain corporate collaborations;

 

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the time and costs involved in filing, prosecuting and enforcing patent claims; and

 

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competing pharmacological and market developments.

 

 

 

 

 

 

 

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the results of our current and any future clinical trials of our product candidates;

 

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the results of ongoing preclinical studies and planned clinical trials of our preclinical product candidates;

 

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the entry into, or termination of, key agreements, including, among others, key collaboration and license agreements;

 

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the results and timing of regulatory reviews relating to the approval of our product candidates;

 

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the initiation of, material developments or conclusion of litigation to enforce or defend any of our intellectual property rights;

 

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failure of any of our product candidates, if approved, to achieve commercial success;

 

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general and industry-specific economic conditions that may affect our research and development expenditures;

 

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the results of clinical trials conducted by others on drugs that would compete with our product candidates;

 

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issues in manufacturing our product candidates or any approved products;

 

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the loss of key employees;

 

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the introduction of technological innovations or new commercial products by our competitors;

 

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changes in estimates or recommendations by securities analysts, if any, who cover our common stock;

 

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future sales of our common stock; and

 

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period-to-period fluctuations in our financial results.

 

 

 

 

 

 

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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.

 

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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.

 

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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.

 

 

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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.

 

 

 

 

 

·       approximately 2.5 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.

 

 

 

 

 

 

 

 

 

 

 

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the efficacy, safety and intended utilization of our product candidates;

 

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the conduct and results our of research, discovery and preclinical efforts and clinical trials;

 

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our plans regarding future research, discovery and preclinical efforts and clinical activities, collaborative, intellectual property and regulatory activities; and

 

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our results of operations, financial condition and businesses, and products and drug candidates under development.

 

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our product candidates that appear promising in early research and clinical trials may not demonstrate safety and efficacy in subsequent clinical trials;

 

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risks associated with reliance on collaborative partners for further clinical trials and other development activities; and

 

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risks involved with development and commercialization of product candidates.

 

 

 

 

 

 

 

·	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 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.

 

 

 

 

 

 

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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

URG101

Market Opportunity for Treatment of Painful Bladder Syndrome

 

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 estimate based on a cutoff score of 10 on the pain, urgency/frequency scale, and assumed a ratio of 1:2 for men to women and for interstitial cystitis population, we used a more stringent cutoff score of 15.

 

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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 (720,000 shares), 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.

 

 

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.

 

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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.

 

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.

 

 

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 has been paid through June 30, 2007 and $50,000 was paid in August 2007 with the balance of $50,000 being paid 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.

 

We have multiple intellectual property filings around our product. 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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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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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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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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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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We have licensed U.S. Patent Application Serial No. 09/943,380 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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Our failure to obtain patent protection or otherwise protect our proprietary technology or proposed products may have a material adverse effect on its 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.

 

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.

 

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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.

 

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, as well as the competitors described above, 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.

 

 

As of December 5, 2007 we employ six individuals full-time, including three 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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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Registration Statement that are not historical facts are "forward-looking statements" which can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Registration Statement, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:

 

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Urigen’s product candidates that appear promising in early research and clinical trials may not demonstrate safety and efficacy in subsequent clinical trials;

 

·

risks associated with reliance on collaborative partners for further clinical trials and other development activities; and

 

·

risks involved with development and commercialization of product candidates.

 

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.

 

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●

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 contact 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.

 

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 2007. 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 research and 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 ends 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 $1.0 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.

 

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Three Months Ended September 30, 2007 and 2006

 

Overview

For the quarter ended September 30, 2007, we incurred significant losses primarily due to the $2,100,000 of non cash interest expense accured in conjunction with the Series B Convertible Preferred Stock and Purchase Agreement with Platinum-Montaur Life Science LLC.  We also expect that operating results will fluctuate from quarter to quarter and that such fluctuations may be substantial. At September 30, 2007, our accumulated deficit was $8,118,633.  We expect to incur substantial losses for the foreseeable future and do not expect to generate revenue from the sale of products in the foreseeable future, if at all.

There have been no significant changes in our critical accounting policies during the three months ended September 30, 2007 as compared to what was previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2007 filed with the Securities and Exchange Commission (the “SEC”) on October 5, 2007.

Revenue

There were no revenues for the three months ended September 30, 2007 and 2006.

 

Research and Development Expenses

Research and development expenses decreased $257,974 to $156,081 for the three months ended September 30, 2007. The decrease was primarily due to the reduction in clinical trial expenses in the three months then ended. We expect research and development expenses to increase in future quarters as we continue our clinical studies of our two product lines and pursue our strategic opportunities.

General and Administrative Expenses

Sales and Marketing Expenses

Sales and marketing expenses increased $38,759 to $52,564 for the three months ended September 30, 2007, compared to $13,805 for the corresponding period in 2006. The increase is mainly due to salaries in the current period. We expect sales and marketing expenses to increase going forward as we proceed to move our technologies forward towards commercialization.

Interest Income and Other Income and Expenses, net

Interest income and other income and expenses, net, increased by $7,787 to $11,599 for the three months ended September 30, 2007, compared to $3,812 in the corresponding period of 2006.

Interest Expense

Interest expense increase $2,128,887 to $2,128,951 for the three months ended September 30, 2007, compared to $64 in the corresponding period of 2006.  The increase was primarily due to the $2,100,000 in accrued non-cash interest expense in connection with the Series B Convertible Preferred Stock and Purchase Agreement with Platinum-Montaur Life Science LLC.

 

Stock-Based Compensation

For the three months ended September 30, 2007, the Company recorded $10,740 of stock-based compensation expenses which was included in general and administrative expense in the three months ended September 30, 2007.  There was no stock-based compensation expense in the three months ended September 30, 2006.

The Company did not grant any stock-based awards during the three months ended September 30, 2007. The Company estimated the fair value of stock options using the Black-Scholes-Merton option pricing model. The assumptions used under this model are as follows: (i) due to insufficient 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; (ii) expected volatility was estimated to be 153.7% based on the Company’s historical volatility that matched the expected term; (iii) risk-free rate of 3.7% 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; and (iv) the Company assumed a zero percent dividend yield.

 

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Fair value of stock awards granted is recognized as expense over the service period, net of estimated forfeitures. The Company estimated forfeitures 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 as a cumulative adjustment in the period estimates are revised.

 

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 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.

 

Liquidity and Capital Resources

 

 

 Since our inception, we have financed our operations principally through public and private issuances of our common and preferred stock. We have used the net proceeds from the sale of the common and preferred stock for general corporate purposes, which included funding development and increasing our working capital, reducing indebtedness, pursuing and completing acquisitions of technologies that are complementary to our own, and capital expenditures.  We expect that proceeds received from any future issuance of stock, if any, will be used to fund our efforts to pursue strategic opportunities.

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern.

Net cash used in operating activities for the three months ended September 30, 2007 was $1,503,548, which primarily reflected the net loss of $3,326,185, adjusted for non-cash expenses of $2,142,595. Net cash used in operating activities for the three months ended September 30, 2006 was $319,042, which primarily reflected the net loss of $642,613, adjusted for non-cash expenses of $42,072.

 

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Net cash used by investing activities for the quarter ended September 30, 2007 was $926, which reflected the purchase of fixed assets. There was no net cash used in investing activities for the quarter ended September 30, 2006.

Net cash provided by financing activities for the three months ended September 30, 2007 was $2,320,099, which reflected $2,100,000 for the PIPE transactions and $220,099 of cash received from Valentis, Inc. as part of the merger transaction.  For the three months ended September 30, 2006, net cash provided by financing activities was $10,522, which reflected $8,271 from the issuance of common stock and $2,251 from the exercise of stock options.

 

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. Valentis’ 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.

 

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.

 

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Stock-Based Compensation

 

In December 2004, the FASB issued FAS 123(R), “Share-Based Payment.” FAS 123(R) 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 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.

 

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 as a cumulative adjustment in the period estimates are revised (See Note 11 “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.

 

DESCRIPTION OF PROPERTY

Principal Executive Offices

 

We pay a fee of $2,683 per month, which is based on estimated fair market value, to EGB Advisors, LLC for rent, telephone 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 the Company.

 

 

LEGAL PROCEEDINGS

From time to time we may be a defendant and plaintiff in various legal proceedings arising in the normal course of our business. We are currently not a party to any material pending legal proceedings or government actions, including any bankruptcy, receivership, or similar proceedings. In addition, management is not aware of any known litigation or liabilities involving the operators of our properties that could affect our operations. Should any liabilities incurred in the future, they will be accrued based on management’s best estimate of the potential loss. As such, there is no adverse effect on our consolidated financial position, results of operations or cash flow at this time. Furthermore, Management of the Company does not believe that there are any proceedings to which any director, officer, or affiliate of the Company, any owner of record of the beneficially or more than five percent of the common stock of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company.

 

 

Executive Officers and Directors

 Upon consummation of the Merger, the Company’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 of our current executive officers and directors following the Merger. Each of the executive officers was appointed on July 16, 2007.

 

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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
Tracy Taylor				53		Chairman of the Board
Benjamin F. McGraw, III, Pharm.D.				58		Director
George M. Lasezkay, Pharm.D, J.D.				55		Director
C. Lowell Parsons				63		Director
Cynthia Sullivan				51		Director
Robert Watkins				64		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 June 29, 2007. 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 Roche, 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 June 29, 2007. 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 June 29, 2007. Prior to that, Mr. Nida served as 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.

 

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 from May 1997 through November 2007. 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’s board of directors since December 2005.

 

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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.

 

George M. Lasezkay, Pharm, J.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.

 

Cynthia Sullivan, 51, currently serves as President and Chief Executive Officer of Immunomedics (NasdaqGM: IMMU), a biopharmaceutical company focused on the development of products for cancer, autoimmune, and other serious diseases. She has been employed by Immunomedics since 1985 and has held various positions, including Executive Vice President, Chief Operating Officer, and President. Prior to joining Immunomedics, Ms. Sullivan was employed by Ortho Diagnostic Systems, Inc., a subsidiary of Johnson & Johnson. She earned a BS from Merrimack College, North Andover, Massachusetts, followed by a year of clinical internship with the school of Medical Technology at Muhlenberg Hospital, Plainfield, New Jersey, resulting in a M.T. (ASCP) certification.  She completed an MS degree from Fairleigh Dickinson University where she also received her MBA. Ms. Sullivan was appointed as chairperson of the Company’s audit committee.

Robert Watkins, 64, established R.J. Watkins & Company, Ltd., an executive recruiting and consulting firm, and currently serves as President and Chairman. Mr. Watkins experience includes President and Chief Executive Officer of a $200 million entertainment company and Managing Director for the San Diego office of the international consulting firm of Russell Reynolds Associates. He has held executive positions with American Hospital Supply Corporation, serving on the corporation’s acquisition and divestiture team. He also served as Management Consultant for the national accounting firm Deloitte & Touche.  Mr. Watkins holds a BA degree from San Diego State University. Mr. Watkins was appointed as chair of the Company’s compensation committee and a member of the Company’s governance committee.

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. The Audit Committee is composed of three independent non-employee directors: Mr. Taylor, Dr. McGraw and Ms. Sullivan.

 

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 stock option plans and otherwise determines compensation levels and performs such other functions regarding compensation as the Board of Directors may delegate. The Compensation Committee is composed of three independent non-employee directors: Dr. McGraw, Mr. Watkins and Ms. Sullivan. 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.

 

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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. The Nominating Committee is composed of three independent non-employee directors: Mr.  Taylor, Dr. Lasezkay and Mr. Watkins. 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.

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

 

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 perfect 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.

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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, 875 Mahler Road, 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.

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.

 

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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.

 

 

In May 2006, we 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 we terminate 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.

 

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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 Mr. 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.

 

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 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

 

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.

Name		Shares of Common Stock Beneficially Owned				Percentage
William J. Garner M.D, President, Chief Executive Officer and Director			18,476,540				26.67	%
Martin E. Shmagin, Chief Financial Officer and Director			2,914,073				4.21	%
Terry M. Nida, Chief Operating Officer			3,135,049				4.52	%
Benjamin F. McGraw, Pharm.D, Chairman of the Board			*				*	%
Tracy Taylor, Director			*
C. Lowell Parsons, Director			1,802,693				2.60	%
George M. Lasezkay, Pharm.D., J.D., Director			*				*	%
Cynthia Sullivan			*				*	%
Robert Watkins			*				*	%
All officers and directors as a group (8 individuals)			26,328,355				38.00	%

  * 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 November 20, 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 securities to 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			$	7.69				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 the Company’s 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.

 

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DESCRIPTION OF SECURITIES

 

The following information describes our common stock and provisions of our amended and restated certificate of incorporation and bylaws, as amended, all as in effect upon the date of this joint proxy statement/prospectus. This description is only a summary. You should also refer to our amended and restated certificate of incorporation and bylaws, which have been previously filed with the SEC and are incorporated by reference as exhibits into the registration statement of which this joint proxy statement/prospectus is a part and more fully described below.

 

Common Stock

 

Our total authorized capital stock is 200,000,000 shares of which 190,000,000 shares authorized are common stock, and 10,000,000 shares authorized are preferred stock. As of December 5, 2007, there are 69,289,535 shares of common stock issued and outstanding. Of the 10,000,000 authorized shares of preferred stock, 210 shares have been designated Series B Preferred Stock and are issued and outstanding at December 5, 2007.

 

The holders of the Company’s common stock are entitled to one vote per share on all matters to be voted on by our stockholders, including the election of directors. The Company’s stockholders are not entitled to cumulative voting rights, and, accordingly, the holders of a majority of the shares voting for the election of directors can elect the entire board of directors if they choose to do so and, in that event, the holders of the remaining shares will not be able to elect any person to our board of directors.

 

The holders of the Company’s common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors, in its discretion, from funds legally available therefor and subject to prior dividend rights of holders of any shares of our preferred stock which may be outstanding. Bank credit agreements that we may enter into from time to time and debt securities that we may issue from time to time may restrict our ability to declare or pay dividends on its common stock. Upon the Company’s liquidation, dissolution or winding up, subject to prior liquidation rights of the holders of our preferred stock, the holders of our common stock are entitled to receive on a pro rata basis our remaining assets available for distribution. Holders of the Company’s common stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to such shares. All outstanding shares of the Company’s common stock are, and all shares being offered by this joint proxy statement/prospectus will be, fully paid and not liable to further calls or assessment by the Company.

 

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.

 

Anti-Takeover Provisions

 

The provisions of the Delaware General Corporation Law (“DGCL”) and the Company’s amended and restated certificate of incorporation and amended bylaws may have the effect of delaying, deferring, or discouraging another person from acquiring control of the Company. Such provisions could limit the price that some investors might be willing to pay in the future for our common stock. These provisions of the DGCL and the Company’s amended and restated certificate of incorporation and amended bylaws may also have the effect of discouraging or preventing certain types of transactions involving an actual or threatened change of control of the Company, including unsolicited takeover attempts, even though such a transaction may offer stockholders the opportunity to sell their stock at a price above the prevailing market price.

 

We are subject to Section 203 of the DGCL, which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any “business combination” with an “interested stockholder” for a period of three years following the time that such stockholder became an interested stockholder, unless:

 

●	the board of directors of the corporation approves either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder, prior to the time the interested stockholder attained that status;

 

●

upon the closing of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (a) by persons who are directors and also officers and (b) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

 

●

at or subsequent to such time, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.

 

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With certain exceptions, an “interested stockholder” is a person or group who or which owns 15% or more of the corporation’s outstanding voting stock (including any rights to acquire stock pursuant to an option, warrant, agreement, arrangement or understanding, or upon the exercise of conversion or exchange rights, and stock with respect to which the person has voting rights only), or is an affiliate or associate of the corporation and was the owner of 15% or more of such voting stock at any time within the previous three years.

 

In general, Section 203 defines a business combination to include:

 

●	any merger or consolidation involving the corporation and the interested stockholder;

 

●	any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;

 

●	subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

 

●	any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of the corporation beneficially owned by the interested stockholder; or

 

●	the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

 

A Delaware corporation may “opt out” of this provision with an express provision in its original certificate of incorporation or an express provision in its amended and restated certificate of incorporation or bylaws resulting from a stockholders’ amendment approved by at least a majority of the outstanding voting shares. However, we have not “opted out” of this provision. Section 203 could prohibit or delay mergers or other takeover or change-in-control attempts and, accordingly, may discourage attempts to acquire the Company.

 

INDEX TO FINANCIAL STATEMENTS

 

Urigen N.A. Inc., Fiscal Year Ended June 30,  2007 and Fiscal Period Ended June 30, 2006
Report of Independent Registered Public Accounting Firm	F-1
Balance Sheets as of June 30, 2007 and 2006	F-2
Statements of Operations for the year ended June 30, 2007 and for the period from July 18, 2005 (date of inception) to June 30, 2006	F-3
Statements of Stockholder’s Equity (Deficit) for the period from July 18, 2005 to June 30, 2007	F-4 - F-6
Statement of Cash flows for the year ended June 30, 2007 and for the period from July 18, 2005 (date of inception) to June 30, 2006	F-7
Notes to Financial Statements	F-8
Urigen Pharmaceuticals, Inc. Fiscal Years Ended June 30, 2007 and 2006
Report of Independent Registered Public Accounting Firm – Burr, Pilger & Mayer LLP	F-25
Report of Independent Registered Public Accounting Firm – Ernst & Young LLP	F-26
Consolidated Balance Sheet as of June 30, 2007 and 2006	F-27
Consolidated Statements of Operations for the years ended June 30, 2007, 2006 and 2005	F-28
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2007, 2006 and 2005	F-29
Consolidated Statements of Cash Flows for the years ended June 30, 2007, 2006 and 2005	F-30
Notes to Consolidated Financial Statements for the years ended June 30, 2007, 2006 and 2005	F-31
Urigen Pharmaceuticals, Inc. Quarter Ended September 30, 2007
Unaudited Condensed Consolidated Balance Sheet	F-48
Unaudited Condensed Consolidated Statements of Operations	F-49
Unaudited Condensed Consolidated Statements of Cash Flows	F-50
Unaudited Condensed Notes to Consolidated Financial Statements	F-51

 

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URIGEN N.A., INC.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

for the period from July 18, 2005 (date of inception) to June 30, 2007

						Series A								Series B																Deficit
		Series A				Preferred				Series B				Preferred								Common						Accumulated		accumulated		Total
		Preferred				Stock				Preferred				Stock				Common				Stock				Additional		other		during		stockholders'
		Stock				Subscribed				Stock				Subscribed				Stock				Subscribed				Paid-In		comprehensive		development		equity
		Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Capital		income		stage		(deficit)
Common stock issued at $0.50 per share upon incorporation in July 2005*																		2	$	1											$	1
Preferred stock subscribed at $0.44085 per share in July 2005*						100,000	$	44,085																								44,085
Preferred stock subscribed at
$0.43875 per share in August 2005*						150,000		65,813																								65,813
Preferred stock subscribed at a range of
$0.43875 to $0.43975 per share in September 2005*						300,000		131,725																								131,725
Preferred stock subscribed at a range of
$0.43305 to $0.44085 per share in October 2005*						308,856		135,054																								135,054
Preferred stock subscribed at
$0.43885 per share in November 2005*						235,420		103,314																								103,314
Common stock issued at $0.00005 per share
to Urigen, Inc. shareholders in December 2005*																		11,999,998		559												559
Preferred stock subscribed at a range of
$0.4339 to $0.4553 per share in December 2005*						263,024		116,709																								116,709
Common stock issued at $0.00005 per share
to Urigen, Inc. shareholders in January 2006*																		1,750,000		88												88
Common stock issued at $0.43565 per share
in lieu of rent payment in January 2006*																		4,200		1,830												1,830
Preferred stock subscribed at a range of
$0.28205 to $0.4466 per share in January 2006*						1,903,604		822,017																								822,017
Preferred stock subscribed at a range of
$0.43015 to $0.4354 per share in February 2006*						410,186		178,286																								178,286
Common stock issued at $0.4284 per share
in lieu of rent payment in March 2006*																		4,200		1,798												1,798
Preferred stock subscribed at a range of
$0.4284 to $0.44125 per share in March 2006*						258,854		111,640																								111,640
Common stock issued at $0.4279 per share
pursuant to an exercise of a stock option in
April 2006*																		20,000		8,558												8,558
Preferred stock subscribed at a range of
$0.4301 to $0.44085 per share in April 2006*						146,844		63,661																								63,661
Common stock issued at $0.125 per share
pursuant to a consulting agreement net of
issuance cost of $2,926 in May 2006*																		840,000		102,074												102,074
Common stock issued at $0.125 per share
pursuant to a licensing agreement in May 2006*																		720,000		90,000												90,000
Preferred stock subscribed at $0.45085
per share in May 2006*						58,856		26,535																								26,535
Common stock issued at $0.44655 per share
in lieu of rent payment in June 2006*																		4,200		1,875												1,875
Preferred stock subscribed at a range of
$0.44655 to $0.4525 per share in June 2006*						221,254		99,430																								99,430
Stock issuance costs in June 2006								(5,977)																								(5,977)
Series A Preferred stock issued in June 2006*		4,356,898	$	1,892,292		(4,356,898)		(1,892,292)																								-
Foreign currency adjustment																											$	20,088				20,088
Net loss																													$	(1,540,412)		(1,540,412)
Total comprehensive loss																																(1,520,324)
Balances at June 30, 2006		4,356,898	$	1,892,292		-		-		-		-		-		-		15,342,600	$	206,783		-		-		-	$	20,088	$	(1,540,412)	$	578,751

 

 

 

F-4

---

 

URIGEN N.A., INC.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT), continued

for the period from July 18, 2005 (date of inception) to June 30, 2007

 

 

																																																				Deficit
																																																Accumulated				accumulated				Total
		Series A							Series A			Series B								Series B																								Additional				other				during				stockholders'
		Preferred Stock							Preferred Stock  Subscribed			Preferred Stock								Preferred Stock Subscribed								Common Stock								Common Stock Subscribed								Paid-In				comprehensive				development				equity
		Shares				Amount			Shares	Amount		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Capital				income				stage				(deficit)
Balances at June 30, 2006			4,356,898			$	1,892,292																						15,342,600			$	206,783															$	20,088			$	(1,540,412	)		$	578,751
Common stock issued at $0.125 per share pursuant
to a consulting agreement in August 2006*																													50,000				6,250																								6,250
Common stock subscribed at $0.4501 per share
pursuant to a stock option plan in August 2006*																																					15,000			$	6,752																6,752
Common stock issued at a range of $0.44355 to
$0.4466 per share in lieu of consulting fees
in September 2006*																													49,690				22,102																								22,102
Common stock issued at $0.4501 per share
pursuant to a stock option plan in September 2006*																													10,000				4,501				(10,000	)			(4,501	)															-
Common stock issued at $0.125 per share pursuant
to a consulting agreement in September 2006*																													50,000				6,250																								6,250
Common stock issued at $0.4488 per share in lieu of
rent payment in September 2006*																													4,200				1,885																								1,885
Correction of previously issued Series A preferred
stock*			2,040				-																																																		-
Reclassification of common stock to additional
paid-in capital upon re-domestication																													-				(247,616	)										$	247,616												-
Series B preferred stock subscribed at $2.50 per share
in October 2006																					46,000			$	115,000																																115,000
Series B preferred stock issued at $2.50 per share
in October 2006													46,000			$	115,000				(46,000	)			(115,000	)																															-
Series B preferred stock issued at $2.50 per share
pursuant to an exchange agreement in October 2006													1,000				2,500																																								2,500
Series B preferred stock issued at $2.50 per share
pursuant to a vendor agreement in October 2006													4,000				10,000																																								10,000
Series B preferred stock issued at $2.50 per share
pursuant to a promissory note in October 2006													1,000				2,500																																								2,500
Series B preferred stock issued at $2.50 per share
pursuant to a vendor agreement in November 2006													4,000				10,000																																								10,000
Series B preferred stock subscribed at $2.50 per share
in November 2006																					100,000				250,000																																250,000
Series B preferred stock issued at $2.50 per share
in November 2006													100,000				250,000				(100,000	)			(250,000	)																															-
Series B preferred stock issued at $2.50 per share
pursuant to a vendor agreement in December 2006													4,000				10,000																																								10,000
Series B preferred stock subscribed at $2.50 per share
to officers in lieu of cash payroll in December 2006																					74,560				186,400																																186,400
Series B preferred stock issued at $2.50 per share
to an officer in lieu of cash payroll in January 2007													30,000				75,000				(30,000	)			(75,000	)																															-
Series B preferred stock issued at $2.50 per share
pursuant to a vendor agreement in January 2007													4,000				10,000																																								10,000
Series B preferred stock issued at $2.50 per share
pursuant to a consulting agreement in January 2007													19,200				48,000																																								48,000
Series B preferred stock issued at $2.50 per share
pursuant to a promissory note in January 2007													500				1,250																																								1,250
Series B preferred stock issued at $2.50 per share
to an officer in lieu of cash payroll in January 2007													10,000				25,000																																								25,000
Series B preferred stock issued at $2.50 per share
in January 2007													20,000				50,000																																								50,000

 

 

 

 

F-5

---

 

URIGEN N.A., INC.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT), continued

for the period from July 18, 2005 (date of inception) to June 30, 2007

 

 

																														Deficit
																												Accumulated		accumulated
						Series A				Series B				Series B														other		during		Total
		Series A Preferred Stock				Preferred Stock Subscribed				Preferred Stock				Preferred Stock Subscribed				Common Stock				Common Stock Subscribed				Additional Paid-In		comprehensive		development		stockholders' equity
		Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Capital		income		stage		(deficit)
Series B preferred stock issued at $2.50 per share
pursuant to a vendor agreement in February 2007										4,000		$  10,000																				$        10,000
Series B preferred stock issued at $2.50 per share
to an officer in lieu of cash payroll in February 2007										10,000		25,000																				25,000
Series B preferred stock issued at $2.50 per share
pursuant to a vendor agreement in March 2007										4,000		10,000																				10,000
Series B preferred stock issued at $2.50 per share
to an officer in lieu of cash payroll in March 2007										10,000		25,000																				25,000
Series B preferred stock issued at $2.50 per share
pursuant to a vendor agreement in April 2007										4,000		10,000																				10,000
Series B preferred stock issued at $2.50 per share
to an officer in lieu of cash payroll in April 2007										10,000		25,000																				25,000
Series B preferred stock issued at $2.50 per share
pursuant to a vendor agreement in May 2007										4,000		10,000																				10,000
Series B preferred stock issued at $2.50 per share
to officers in lieu of cash payroll in May 2007										175,827		439,567		(44,560)		$(111,400)																328,167
Series B preferred stock issued at $2.50 per share
pursuant to a vendor agreement in May 2007										500		1,250																				1,250
Series B preferred stock issued at $2.50 per share
to a consultant in lieu of cash in May 2007										25,476		63,690																				63,690
Series B preferred stock issued at $2.50 per share
pursuant to a consulting agreement in May 2007										3,200		8,000																				8,000
Series B preferred stock issued at $2.50 per share
to an officer in lieu of cash payroll in May 2007										10,000		25,000																				25,000
Series B preferred stock issued at $2.50 per share
pursuant to consulting agreements in May 2007										16,000		40,000																				40,000
Series B preferred stock issued at $2.50 per share
pursuant to a vendor agreement in June 2007										4,000		10,000																				10,000
Series B preferred stock issued at $2.50 per share
to an officer in lieu of cash payroll in June 2007										10,000		25,000																				25,000
Series B preferred stock subscribed at $2.50 per share
pursuant to a consulting agreement in June 2007														3,200		8,000																8,000
Series B preferred stock subscribed at $2.50 per share
to a consultant in lieu of cash in June 2007														3,185		7,962																7,962
Series B preferred stock subscribed at $2.50 per share
to officers in lieu of cash payroll in June 2007														24,344		60,860																60,860
Reclassification of Series A preferred stock to
common pursuant to a stockholder vote in
June 2007		(4,358,938)		(1,892,292)														4,358,938		44						$ 1,892,248						-
Foreign currency adjustment																												$               (288)				(288)
Net loss																														$   (3,252,036)		(3,252,036)
Total comprehensive loss																																(3,252,324)
Balances at June 30, 2007		-	$	-		-	$	-		534,703	$	1,336,757		30,729	$	76,822		19,865,428	$	199		5,000	$	2,251	$	2,139,864	$	19,800	$	(4,792,448)	$	(1,216,755)

 

* reflects a two-for-one stock split.

 

F-6

---

 

URIGEN N.A., INC.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

STATEMENTS OF CASH FLOWS

______________

						Period from				Period from
						July 18, 2005				July 18, 2005
		Year ended				(date of inception) to				(date of inception) to
		June 30, 2007				June 30, 2006				June 30, 2007
Cash flows from operating activities:
Net loss		$	(3,252,036	)		$	(1,540,412	)		$	(4,792,448	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			2,255				-				2,255
Amortization of intangible assets			14,428				4,700				19,128
Non-cash expenses: compensation, interest, rent, and other			1,035,066				247,044				1,282,110
Changes in operating assets and liabilities:
Prepaid expenses and other assets			(17,228	)			-				(17,228	)
Accounts payable			652,659				40,558				693,217
Accrued expenses			354,283				31,058				385,341
Amounts due to related parties			(19,771	)			245,839				226,068
Net cash used in operating activities			(1,230,344	)			(971,213	)			(2,201,557	)
Cash flows from investing activities:
Purchases of fixed assets			(2,725	)			(4,056	)			(6,781	)
Asset-based purchase, net of cash acquired, from Urigen, Inc.			-				470,000				470,000
Net cash (used in) provided by investing activities			(2,725	)			465,944				463,219
Cash flows from financing activities:
Proceeds from issuance of notes payable -- related party			300,000				-				300,000
Payment of receivables from stockholders			45,724				-				45,724
Proceeds from common stock subscription			6,752				-				6,752
Proceeds from issuance of Series B convertible preferred stock,
net of issuance costs			415,000				-				415,000
Proceeds from issuance of Series A convertible preferred stock,
net of issuance costs			-				1,002,135				1,002,135
Proceeds from exercise of stock options			-				8,558				8,558
Net cash provided by financing activities			767,476				1,010,693				1,778,169
Effect of exchange rate changes on cash			(288	)			62,065				61,777
Net increase in cash			(465,881	)			567,489				101,608
Cash, beginning of period			567,489				-				-
Cash, end of period		$	101,608			$	567,489			$	101,608
Non-cash investing and financing activities:
Intangible assets acquired through issuance of common stock		$	-			$	90,560			$	90,560
Non-cash portion related to asset-based purchase from Urigen, Inc.:
Assumption of notes payable subsequently converted to preferred stock		$	-			$	255,000			$	255,000
Non-cash portion related to asset-based purchase from Urigen, Inc.:
Assumption of subscription agreements subsequently converted to
preferred stock		$	-			$	480,000			$	-
Amount due from stockholders for issuance of preferred stock		$	-			$	45,724			$	45,724
Supplemental Cash Flow Information:
Cash paid for interest		$	31,298			$	287			$	31,585

 

 

F-7

---

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

1.    Nature of Operations and Business Risks

Urigen N.A., Inc. (“the Company”), a Delaware incorporated company, is a specialty pharmaceutical company dedicated to the development and commercialization of therapeutic products for urological disorders. The Company has five programs in development that are either in or positioned to enter Phase 2 clinical trials. The pipeline includes URG101, for the treatment of Chronic Pelvic Pain (CPP); URG102, targeting symptoms of CPP secondary to pelvic irradiation; URG103, targeting dyspareunia; URG301, targeting acute urethral discomfort; and URG302, targeting urethritis. The Company was originally incorporated in British Columbia on July 18, 2005 (date of inception) as Urigen Holdings, Inc. and on October 4, 2006, in accordance with the vote of the stockholders, the company re-domesticated to Delaware and changed its name to Urigen N.A., Inc.

On October 1, 2006, at a special meeting of stockholders, the stockholders voted for the continuation of the Company from a British Columbia corporation to a State of Delaware corporation. Management and the Board of Directors of the Company concluded that continuation and re-incorporation of the Company as a Delaware company is in the best interests of the Company and its stockholders. In addition, the stockholders approved the following changes:

·

To reduce the number of authorized common shares from unlimited to 20,000,000 and to authorize 6,000,000 of preferred shares (5,000,000 designated for Series A).

 

·

To establish a stated par value of $0.00001.

 

·

Upon re-domestication to the U.S., all existing stockholders will receive 2 shares for every outstanding share of common and preferred stock.

On October 4, 2006, in accordance with the vote of the stockholders, the Company re-domesticated to Delaware and changed its name to Urigen N.A., Inc.

On October 5, 2006, the Company entered into an Agreement and Plan of Merger, as subsequently amended (the “Merger”) with Valentis, Inc., a Delaware corporation (“Valentis”), 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 the Company with the Company surviving as the wholly-owned subsidiary of Valentis, Inc. In connection with the Merger, each Urigen stockholder received, in exchange for each share of the Company’s 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 the Company’s Series B preferred stock was exchanged for 11.277 shares of our common stock. An aggregate of 51,226,679 shares of Valentis common stock were issued to the Company’s stockholders. On July 30, 2007, Valentis changed its name from Valentis, Inc. to Urigen Pharmaceuticals, Inc.

The Company’s fiscal year end is June 30.

The Company is in the development stage and its programs are in the clinical trial phase, and therefore has not generated revenues from product sales to date. Even if development and marketing efforts are successful, substantial time may pass before significant revenues will be realized, and during this period the Company will require additional funds, the availability of which can not be assured.

 

F-8

---

 

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

1.    Nature of Operations and Business Risks, continued

Consequently, the Company is subject to the risks associated with development stage companies, including the need for additional financings; the uncertainty of the Company’s research and development efforts resulting in successful commercial products as well as the marketing and customer acceptance of such products; competition from larger organizations; reliance on the proprietary technology of others; dependence on key personnel; uncertain patent protection; and dependence on corporate partners and collaborators. To achieve successful operations, the Company may require additional capital to continue research and development and marketing efforts. No assurance can be given as to the timing or ultimate success of obtaining future funding.

2.	Summary of Significant Accounting Policies

Basis of Presentation

The Company’s financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Since inception through June 30, 2007, the Company has accumulated net losses of $4,792,448 and negative cash flows from operations of $2,201,557 and has a negative working capital of $1,481,814. Management expects to incur further losses for the foreseeable future. The Company expects to finance future cash needs primarily through proceeds from equity or debt financings, loans, and/or collaborative agreements with corporate partners in order to be able to sustain its operations until the Company can achieve profitability and positive cash flows, if ever. Management plans to seek additional debt and/or equity financing for the Company through private or public offerings, but it cannot assure that such financing will be available on acceptable terms, or at all. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company effected a 2-for-1 stock split of its common stock and Series A preferred stock on October 4, 2006 on the re-domestication of the Company from British Columbia to Delaware. The financial statements and notes to the financial statements have been adjusted retroactively to reflect a 2 for 1 stock split of the common stock and Series A preferred stock.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of expenses during the reporting period, and amounts disclosed in the notes to the financial statements. Actual results could differ from those estimates.

Foreign Currency

The functional currency of the Company until October 4, 2006 was the Canadian dollar (local currency). Starting on October 5, 2006, the functional currency is the U.S. dollar (local currency). The transactions from date of inception through October 4, 2006 in these financial statements and notes to the financial statements of the Company have been translated into U.S. dollars using period-end exchange rates for assets and

 

 

F-9

---

 

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

 

2.	Summary of Significant Accounting Policies, continued

Foreign Currency, continued

liabilities, and monthly average exchange rates for expenses. Intangible assets and equity are translated at historical exchange rates. Translation gains and losses are deferred and recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity (deficit).

Transaction gains and losses that arise from exchange rate changes denominated in other than the local currency are included in other expenses in the statement of operations and are not considered material for the period presented.

 

Fair Value of Financial Instruments

 

The carrying amounts of certain of the Company’s financial instruments including cash, due from stockholders, prepaid expenses, notes payable, accounts payable, accrued expenses, and due to related parties approximate fair value due to their short maturities.

 

Cash Concentration

 

At June 30, 2007, the Company had $1,162 in bank balances at a single U.S. financial institution in excess of the Federal Deposit Insurance Corporation coverage limit of $100,000.  At June 30, 2006, the Company had $574,567 (in US dollars) in bank balances at a single Canadian financial institution in excess of the Canada Deposit Insurance Corporation coverage limit of 100,000 Canadian dollars.

 

Intangible Assets

 

Intangible assets include the intellectual property and other patented rights acquired. Consideration paid in connection with acquisitions is required to be allocated to the acquired assets, including identifiable intangible assets, and liabilities acquired. Acquired assets and liabilities are recorded based on the Company’s estimate of fair value, which requires significant judgment with respect to future cash flows and discount rates. For intangible assets other than goodwill, the Company is required to estimate the useful life of the asset and recognize its cost as an expense over the useful life. The Company uses the straight-line method to expense long-lived assets (including identifiable intangibles). The intangible assets were recorded based on their estimated fair value and are being amortized using the straight-line method over the estimated useful life of 20 years, which is the life of the intellectual property patents.

 

Impairment of Long-Lived Assets

 

The Company regularly evaluates its business for potential indicators of impairment of intangible assets. The Company’s judgments regarding the existence of impairment indicators are based on market conditions, operational performance of the business and considerations of any events that are likely to cause impairment. Future events could cause the Company to conclude that impairment indicators exist and that intangible assets are impaired. The Company currently operates in one reportable segment, which is also the only reporting unit for the purposes of impairment analysis.

 

F-10

---

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

2.	Summary of Significant Accounting Policies, continued

Impairment of Long-Lived Assets, continued

The Company evaluates its long-lived assets for indicators of possible impairment by comparison of the carrying amounts to future net undiscounted cash flows expected to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value or discounted estimates of future cash flows. The Company has not identified any such impairment losses to date.

Income Taxes

Income taxes are recorded under the balance sheet method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Research and Development

Research and development expenses include clinical trial costs, outside consultants and contractors, and insurance for the Company’s research and development activities. The Company recognizes such costs as expense when they are incurred.

Comprehensive Income (Loss)

The Company reports comprehensive income (loss) in accordance with the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, which establishes standards for reporting comprehensive income (loss) and its components in the financial statements. The components of other comprehensive income (loss) consists of net loss and foreign currency translation adjustments. Comprehensive income (loss) and the components of accumulated other comprehensive income (loss) are presented in the accompanying statement of stockholders’ equity (deficit).

		Year  Ended June 30, 2007				Period from July 18,2005 (date of inception) to June 30, 2007
Net loss		$	(3,252,036	)		$	(4,792,448	)
Foreign currency translation adjustments, net of tax			(288	)			19,800
Comprehensive loss		$	(3,252,324	)		$	(4,772,648	)

 

 

F-11

---

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

2.	Summary of Significant Accounting Policies, continued

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which requires the measurement of all share-based payments to employees, including grants of stock options, using a fair-value-based method and the recording of such expense in the statement of operations for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. In addition, as required by Emerging Issues Task Force Consensus No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services, the Company records stock and options granted at fair value of the consideration received or the fair value of the equity investments issued as they vest over a performance period.

Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform with the current year presentation, none of which had an effect on total assets, total equity (deficit), or the net loss.

Recent Accounting Pronouncements

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 financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“SFAS 159”). SFAS 159 provides entities with the option to report selected financial assets and liabilities at fair value. Business entities adopting SFAS 159 will report unrealized gains and losses in earnings at each subsequent reporting date on items for which fair value option has been elected. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires additional information that will help investors and other financial statement users to understand the effect of an entity’s choice to use fair value on its earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company is currently assessing the impact that the adoption of SFAS 159 may have on its financial position, results of operations or cash flows.

3.	Intangible Assets and Related Agreement Commitments/ Contingencies

In January 2006, the Company entered into an asset-based transaction agreement with a related party, Urigen, Inc. Simultaneously, the Company entered into a license agreement with a University for certain patent rights.

The agreement with the University was for a license previously licensed to Urigen, Inc. In exchange for this license, the Company 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, 2007, $25,000 of milestone payments have been incurred. The Company is also

 

 

F-12

---

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

3.	Intangible Assets and Related Agreement Commitments/ Contingencies, continued

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 item 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, Urigen may terminate the license agreement at any time and for any reason upon a 90-day written notice.

The Company’s agreement with Urigen, Inc. included an assignment of a patent application and intellectual property rights associated therein, and the transfer of other assets and liabilities of Urigen, Inc., resulting in the recognition of intangible assets, as follows:

Cash		$	350,000
Receivable from Urigen, Inc.    (collected during the period ended June 30, 2006)			120,000
Expenses paid on behalf of the Company			76,923
Convertible debt			(255,000	)
Subscription agreements for preferred shares			(480,000	)
Other			(560	)
Net intangible assets acquired		$	188,637

In May 2006, the Company entered into a license agreement with Kalium, Inc., for patent rights and technology relating to suppositories for use in the genitourinary or gastrointestinal system and for the development and utilization of this technology to commercialize products. Under the terms of the agreement, the Company issued common stock in the amount of 720,000 shares (with an estimated fair value of $90,000) and shall pay Kalium royalties based on percentages of 2.0-4.5% of net sales of licensed products during the defined term of the agreement. The Company also is required to make milestone payments (based on achievement of certain events related to FDA approval) of up to $457,500. Milestone payments may be made in cash or common stock, at the Company’s discretion. Kalium shall have the right to terminate rights under this license agreement or convert the license to non-exclusive rights if the Company fails to meet certain milestones over the next three years.

The summary of intangible assets acquired and related accumulated amortization as of June 30, 2007 is as follows:

 

Patent and intellectual property rights		$	278,637
Less: Accumulated amortization			(19,128	)
Intangible assets, net		$	259,509

 

 

F-13

---

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

3.	Intangible Assets and Related Agreement Commitments/ Contingencies, continued

Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the assets, with a weighted average amortization period of 20 years. The Company reported amortization expense on purchased intangible assets of $14,428 and $4,700 for the years ended June 30, 2007 and 2006, respectively, which is included in research and development expense in the accompanying statements of operations. Future estimated amortization expense is as follows:

July 1, 2007 – June 30, 2008		$	14,428
July 1, 2008 – June 30, 2009			14,428
July 1, 2009 – June 30, 2010			14,428
July 1, 2010 – June 30, 2011			14,428
July 1, 2011 – June 30, 2012			14,428
Thereafter			187,369
		$	259,509

4.	Notes Payable

On November 17, 2006, the Company entered into an unsecured promissory note with 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 issued 1,000 shares of Series B Preferred Stock, par value $0.00001 per share, in connection with this note agreement.

On January 5, 2007, the Company entered into an unsecured promissory note with a related party in the amount of $100,000. Under the terms of the note, the Company is to pay interest at a rate of 12% per annum until paid in full, with interest compounded as additional principal on a monthly basis if said interest is not paid in full by the end of each month. Interest shall be computed on the basis of a 360 day year. All amounts owed by borrower to Lender hereunder are due and payable by Borrower at its option, without notice or demand, on the earlier of (i) ninety (90) days after consummation of the Merger (as defined in the Agreement and Plan of Merger, dated October 5, 2006, by and among Valentis, Inc., Valentis Holdings, Inc. and Urigen N.A. Inc.) or the consummation of any other business combination or similar transaction that results in a change of control (as defined in the note agreement) of the Borrower, (ii) the occurrence of an Event of Default, or (iii) the second anniversary of the date hereof (in each case, the “Due Date”). Also, the Company issued 500 shares of Series B Preferred Stock, par value $0.00001 per share, in connection with this note agreement.  If this note is not paid when due, interest shall accrue thereafter at the rate of 18% per annum.

5.	Income Taxes

There is no provision for income taxes because the Company has incurred operating losses to date.  Deferred income taxes reflect the net tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the

 

 

F-14

---

 

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

5.	Income Taxes, continued

amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows as of June 30, 2007 and 2006:

Deferred tax assets (liabilities):		2007				2006
Federal and state net operating losses		$	1,098,906			$	522,581
Tax credits			73,895				-
Other			(8,446	)			1,604
Total deferred tax assets			1,164,355				524,185
Less valuation allowance			(1,164,355	)			(524,185	)
Net deferred tax assets		$	-			$	-

As of June 30, 2007, the Company had a net operating loss carry forward for federal and state income tax purposes of approximately $2.8 million which expire in 2027 and 2017, respectively.  The Company also has federal and state tax credit carryforwards of $44,000 and $46,000, respectively.

Utilization of the Company’s net operating loss carry forward may be subject to substantial limitations due to an ownership change in the Company.  Accordingly, the Company’s ability to utilize net operating loss and tax credit carryforwards may be limited as a result of such ownership changes.  Such a limitation could result in expiration of the carryforwards before they are utilized.

6.	Common Stock

Issuance of Common Stock

In July 2005, the Company issued 2 shares of common stock at $0.50 per share upon incorporation.

In December 2005, the Company issued 11,999,998 shares of common stock to Urigen, Inc. shareholders at $0.00005 per share for aggregate proceeds of $559.

In January 2006, the Company issued 1,750,000 shares of common stock to Urigen, Inc. shareholders at $0.00005 per share for aggregate proceeds of $88. Also, 4,200 shares of common stock were issued at $0.43565 per share for aggregate proceeds of $1,830 in lieu of rent payment.

In March 2006, the Company issued 4,200 shares of common stock at $0.4284 per share for aggregate proceeds of $1,798 in lieu of rent payment.

In April 2006, the Company issued 20,000 shares of common stock at $0.4279 per share for aggregate proceeds of $8,558 pursuant to an exercise of a stock option.

In May 2006, the Company issued 840,000 shares of common stock at $0.125 per share, net of issuance costs of $2,926, pursuant to a consulting agreement. The Company also issued 720,000 shares of common stock at $0.125 per share pursuant to a licensing agreement.

In June 2006, the Company issued 4,200 shares of common stock at $0.44655 per share for aggregate proceeds of $1,875 in lieu of rent payment.

 

 

F-15

---

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

6.	Common Stock, continued

Issuance of Common Stock, continued

In August 2006, the Company issued 50,000 shares of common stock at $0.125 per share for aggregate proceeds of $6,250 pursuant to a consulting agreement. The Company also received payment for 15,000 shares of subscribed common stock at $0.4501 per share for aggregate proceeds of $6,752. In September 2006, 10,000 shares of common stock were issued.

In September 2006, the Company issued 49,690 shares of common stock at a range of $0.44355 to $0.4466 per share for aggregate proceeds of $22,102 in lieu of consulting payments. The Company also issued 50,000 shares of common stock at $0.125 per share for aggregate proceeds of $6,250 pursuant to a consulting agreement. The Company also issued 4,200 shares of common stock at $0.4488 per share for aggregate proceeds of $1,885 in lieu of rent payment.

On June 28, 2007, the Series A preferred shareholders voted to convert 4,358,938 shares of Series A preferred stock to 4,358,938 shares of common stock.

Stock Option Plan

The Company has a stock option plan under which options can be granted to directors, officers, employees, and consultants at an exercise price determined by the Board of Directors. Options generally vest as specified in the underlying option agreement with each party and generally have a term of 10 years. 2,000,000 shares have been authorized for granting under this plan. As of June 30, 2007 and 2006, option activity and outstanding options have not been significant.

Common Stock Trust

The Company has an incentive common stock trust under which shares can be purchased by individuals authorized by the Board of Directors. 2,000,000 shares have been authorized for issuance under this plan. As of June 30, 2007 and 2006, 1,880,000 and 1,890,000 shares respectively have been issued under this plan to consultants in lieu of compensation for services.  On September 30, 2006, the Company repurchased 10,000 shares.

7.	Series A Convertible Preferred Stock

From July 18, 2005 (date of inception) to June 27, 2007, the Company issued 4,358,938 shares of Series A convertible preferred stock (“Series A”) at $0.50 Canadian dollar (“CAD”) per share resulting in gross aggregate proceeds of $1,898,000 U.S. dollars. Issuance costs of $5,977 were incurred as part of the issuance.  These shares were converted to common stock on June 28, 2007.  See Note 6.

 

 

F-16

---

 

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

 

 

7.	Series A Convertible Preferred Stock, continued

The significant rights and privileges of Series A are as follows:

·

Each share of Series A is convertible into one share of common stock at the option of the holder (subject to adjustments for events of dilution) and has the same voting rights as the number of common shares into which it is convertible. Shares will automatically be converted upon the earlier of: (i) immediately prior to the closing of a Qualified IPO; and (ii) the date specified by written consent of agreement of the holders of not less than two-thirds (66 2¤3%) of the then outstanding Series A Preferred Shares.

 

·	If and when declared by the Board of Directors, the holders of Series A are entitled to receive noncumulative dividends. No dividends have been declared or paid as of June 30, 2007.

·

In the event of liquidation, dissolution or winding up of the Company, the holders of Series A then outstanding shall be paid out of available funds and assets, and prior and in preference to any payment or distribution of any available funds and assets on any shares of common stock, an amount equal to 0.50 CAD per share, plus an amount equal to all declared but unpaid dividends on each share.

In the event of any liquidation, dissolution or winding up of the affairs of the Company (a “Liquidation”), either voluntary or involuntary, the Series A stockholders shall be entitled to receive pari passu with any stockholders of other preferred shares, out of the assets of the Company available for distribution to the holders of the Company’s capital stock, an amount equal to the original purchase price of Series A preferred stock plus an amount equal to all declared and unpaid dividends thereon (the “Liquidation Preference”), if any, to the date that payment is made, before any payment shall be made or any assets distributed to the stockholders of common shares or any other class of shares of the Company. If upon the liquidation, dissolution or winding up of the affairs of the Company, the assets to be distributed among the stockholders of preferred shares are insufficient to permit the payment to such stockholders of the full amounts to be distributed to them, then the entire assets of the Company legally available for distribution shall be distributed ratably among the holders of the preferred shares, pari passu, in proportion to the full preferential amount each such stockholder is otherwise entitled to receive.

In July 2005, the Company received a payment for 100,000 shares of subscribed Series A preferred stock at $0.44085 per share for aggregate proceeds of $44,085. The Series A preferred stock was issued in June 2006.

In August 2005, the Company received a payment for 150,000 shares of subscribed Series A preferred stock at $0.43875 per share for aggregate proceeds of $65,813. The Series A preferred stock was issued in June 2006.

In September 2005, the Company received payment for 300,000 shares of subscribed Series A preferred stock at a range of $0.43875 to $0.43975 per share for aggregate proceeds of $131,725. The Series A preferred stock was issued in June 2006.

In October 2005, the Company received payment for 308,856 shares of subscribed Series A preferred stock at a range of $0.43305 to $0.44085 per share for aggregate proceeds of $135,054. The Series A preferred stock was issued in June 2006.

 

 

F-17

---

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

7.	Series A Convertible Preferred Stock, continued

In November 2005, the Company received payment for 235,420 shares of subscribed Series A preferred stock at $0.43885 per share for aggregate proceeds of $103,314. The Series A preferred stock was issued in June 2006.

In December 2005, the Company received payment for 263,024 shares of subscribed Series A preferred stock at a range of $0.4339 to $0.4553 per share for aggregate proceeds of $116,709. The Series A preferred stock was issued in June 2006.

In January 2006, the Company received payment for or converted then outstanding notes into 1,903,604 shares of subscribed Series A preferred stock at a range of $0.28205 to $0.4466 per share for aggregate proceeds of $822,017. The Series A preferred stock was issued in June 2006. The convertible notes (acquired from an asset-based purchase discussed in Note 3) had a provision that upon conversion into stock, a 20-35% discount (as stated in individual note agreements) would apply. The beneficial conversion rate amount of $65,000 was recognized as interest expense in the 2006 accompanying statement of operations.

In February 2006, the Company received payment for 410,186 shares of subscribed Series A preferred stock at a range of $0.43015 to $0.4354 per share for aggregate proceeds of $178,286. The Series A preferred stock was issued in June 2006.

In March 2006, the Company received payment for 258,854 shares of subscribed Series A preferred stock at a range of $0.4283 to $0.44125 per share for aggregate proceeds of $111,640. The Series A preferred stock was issued in June 2006.

In April 2006, the Company received payment for 146,844 shares of subscribed Series A preferred stock at a range of $0.4301 to $0.44085 per share for aggregate proceeds of $63,661. The Series A preferred stock was issued in June 2006.

In May 2006, the Company received payment for 58,856 shares of subscribed Series A preferred stock at $0.45085 per share for aggregate proceeds of $26,535. The Series A preferred stock was issued in June 2006.

In June 2006, the Company received payment or subscription agreements for 221,254 shares of subscribed Series A preferred stock at a range of $0.44655 to $0.4525 per share for aggregate proceeds of $99,430. The Series A preferred stock was issued later in June 2006. Payments for $45,724 in stockholder receivables were received subsequent to June 30, 2006.

In September 2006, the Company issued 2,040 shares of Series A preferred stock to correct a previous issuance.

On June 28, 2007, the Series A preferred shareholders voted to convert 4,358,938 shares of Series A preferred common stock to 4,358,938 shares of common stock.

 

 

F-18

---

 

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

8.	Series B Convertible Preferred Stock

In the year ended June 30, 2007, the Company issued 166,000 shares of Series B preferred stock (“Series B”) at $2.50 per share resulting in gross aggregate proceeds of $415,000.  In addition, the Company issued 368,703 shares of Series B preferred stock in lieu of cash compensation to employees and consultants and for other matters.

The significant rights and privileges of the Series B are as follows:

·	The Series B Preferred Shares shall rank junior to the Series A Preferred Stock and to any other series of capital stock of the Corporation hereafter created, specifically ranking by its terms senior to the Series B Preferred Shares.

 

·

In the event of any liquidation, dissolution or winding up of the affairs of the Company (a “Liquidation”), either voluntary or involuntary, the Series B Holders shall rank on a parity with the Common Shareholders and each Series B preferred share shall receive, after payment has been made to the holders of the Series A preferred shares of the full amounts as to which they are entitled, the same distribution made in respect of each Common Share on the then applicable As-Converted Basis.

 

·

To the extent that the Company declares or pays dividends on or makes any distributions with respect to the common shares, the Company shall declare and pay the same dividend on or make the same distribution with respect to each Series B preferred share on an as Converted Basis. “As-Converted Basis” means that number of common shares into which a Series B Preferred Share is convertible which shall be determined based on the Series B Conversion Ratio (as hereinafter defined) and shall be determined on the date on which the dividend is declared or the distribution is made or such other applicable date. No distributions shall be paid on any common shares during any fiscal year of the Company unless dividends in the amount set forth have also been paid to the holders of Series B preferred shares (the “Series B Holders”), or declared and set apart for payment in respect of each outstanding Series B preferred share, during that fiscal year.

 

In October 2006, the Company received payment for 46,000 shares of subscribed Series B preferred stock at $2.50 per share for aggregate proceeds of $115,000. The Series B preferred stock was issued in October 2006. The Company also issued 1,000 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $2,500 pursuant to an exchange agreement. The Company also issued 4,000 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $10,000 pursuant to a vendor agreement. The Company also issued 1,000 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $2,500 pursuant to a promissory note.

In November 2006, the Company received payment for 100,000 shares of subscribed Series B preferred stock at $2.50 per share for aggregate proceeds of $250,000. The Series B preferred stock was issued in November 2006. The Company also issued 4,000 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $10,000 pursuant to a vendor agreement.

In December 2006, the Company issued 4,000 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $10,000 pursuant to a vendor agreement.

 

 

F-19

---

 

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

 

8.	Series B Convertible Preferred Stock, continued

In January 2007, the Company issued 40,000 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $100,000 to an officer in lieu of payroll. The Company also issued 19,200 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $48,000 pursuant to a consulting agreement. The Company also issued 500 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $1,250 pursuant to a promissory note. Also, the Company issued 4,000 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $10,000 pursuant to a vendor agreement. The Company also issued 20,000 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $50,000.

In February 2007, the Company issued 10,000 shares of Series B preferred stock for aggregate proceeds of $25,000 to an officer in lieu of payroll. The Company also issued 4,000 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $10,000 pursuant to a vendor agreement.

In March 2007, the Company issued 10,000 shares of Series B preferred stock for aggregate proceeds of $25,000 to an officer in lieu of payroll. The Company also issued 4,000 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $10,000 pursuant to a vendor agreement.

In April 2007, the Company issued 4,000 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $10,000 pursuant to a vendor agreement.  The Company also issued 10,000 shares of Series B preferred stock for aggregate proceeds of $25,000 to an officer in lieu of payroll.

In May 2007, the Company issued 4,000 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $10,000 pursuant to a vendor agreement.  The Company also issued 10,000 shares of Series B preferred stock for aggregate proceeds of $25,000 to an officer in lieu of payroll.  The Company also issued 500 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $1,250 pursuant to a vendor agreement.  The Company also issued 3,200 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $8,000 pursuant to a consulting agreement.  The Company also issued 25,476 shares of Series B preferred stock for aggregate proceeds of $63,690 to a consultant.  The Company also issued 175,827 shares of Series B preferred stock at $2.50 per share for aggregate proceeds of $439,567 to employees in lieu of cash payroll for the period from October 2006 through May 2007.  The Company also issued 16,000 shares of Series B preferred stock for aggregate proceeds of $40,000 to consultants.

In June 2007, the Company issued 10,000 shares of Series B preferred stock for aggregate proceeds of $25,000 to an officer in lieu of payroll. The Company also issued 4,000 shares of Series B preferred stock at $2.50 per share for  aggregate proceeds of $10,000 pursuant to a vendor agreement.

9.	Stock Subscribed

In August 2006, the Company received payment for 15,000 shares of subscribed common stock at $.4501 per share for aggregate proceeds of $6,752.  In September 2006, 10,000 shares were issued and 5,000 shares at $2,251 remained as subscribed stock at June 30, 2007.  Subsequent to fiscal year end, these 5,000 shares were repurchased by the Company.

F-20

---

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

 

9.	Stock Subscribed, continued

In December 2006, the Company had 74,560 shares of subscribed Series B preferred stock at $2.50 per share for aggregate proceeds of $186,400 to officers of the Company in lieu of cash payroll for the period October 1, 2006 through December 31, 2006.  In January 2007 and May 2007, these shares were issued.

In June 2007, the Company had 3,200 shares of subscribed Series B preferred stock at $2.50 per share for aggregate proceeds of $8,000 to a consultant in lieu of cash fees.  The Company also had 3,185 shares of subscribed Series B preferred stock at $2.50 per share for aggregate proceeds of $7,962 to another consultant in lieu of cash fees.  The Company also had 24,344 shares of subscribed Series B preferred stock at $2.50 per share for aggregate proceeds of $60,860 to officers of the Company in lieu of cash payroll for the month of June 2007.  These 30,729 shares at $76,822 remain as subscribed stock at June 30, 2007.

10.	Related Party Transactions

In January 2006, the Company entered into an agreement with Urigen, Inc., a related party entity by stockholders in common with Urigen Holdings, Inc. As discussed in Note 3, Urigen, Inc. transferred certain assets to Urigen Holdings, Inc. in exchange for the Company’s assumption of certain liabilities and subscription agreements. As of June 30, 2007 and 2006, no amounts were due to or from the Company.

As of June 30, 2007 and 2006, the Company is paying a fee of $2,683 and $1,500 per month to EGB Advisors, LLC. EGB Advisors, LLC is owned solely by William J. Garner, M.D. and CEO of the Company. Dr. Garner owns 7,762,706 shares of common stock and 85,863 shares of Series B preferred stock at June 30, 2007. The fees are for rent, telephone and other office services which are based on estimated fair market value. Dr. Garner also received payment for services provided as a consultant/ employee to the Company. As of June 30, 2007 and 2006, Dr. Garner and EGB Advisors, LLC were owed $14,610 and $31,313, respectively. From the inception of the Company to June 30, 2007 and 2006, respectively, the Company has paid $128,337 and $59,398 to these related parties.

Several stockholders provided consulting services and were paid $165,885 and $189,161 for those services from the inception of the Company to June 30, 2007 and 2006, respectively. These stockholders cumulatively own 3,539,668 shares of common stock and 169,569 shares of Series B preferred stock at June 30, 2007.  As of June 30, 2007, $8,457 was owed to these consultants.

As of June 30, 2007 and 2006, the Company’s legal counsel in Canada, of which two members are stockholders of 370,000 and 300,000 common shares, respectively, and 0 and 70,000 preferred shares of Series A, respectively, was owed $55,389 and $70,252, respectively.  From the inception of the Company to June 30, 2007 and 2006, the Company paid $77,299 and $42,366, respectively, for legal expenses to the related party stockholders’ company.

As of June 30, 2007 and 2006, the Company’s legal counsel, of which a member is a stockholder of 504,832 common shares, was owed $145,612 and $92,873, respectively. From the inception of the Company to June 30, 2007 and 2006, the Company paid $47,814 and $20,000, respectively, for legal expenses to the related party stockholder’s company.

 

 

F-21

---

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

11.	Commitments and Contingencies

Commitments

The Company has the following consulting/vendor agreements which require issuance of shares as follows:

·	10,000 common shares (or 4,000 Series B preferred shares) per month to a vendor.  This contract is renewable every 6 months.

·	25,000 common shares (or 10,000 Series B preferred shares) per month to a consultant, until the Company raises $5 million.  As of June 30, 2007, the Company had not raised $5 million and thus this commitment remains active.

Indemnification

Under certain patent agreements, the Company has agreed to indemnify the licensors of the patented rights and technology against any liabilities or damages arising out of the development, manufacture, or sale of the licensed asset.

 

12.	Subsequent Events

On October 5, 2006, the Company entered into an Agreement and Plan of Merger with Valentis, Inc., and Valentis Holdings, Inc., a 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 the Company with the Company surviving as a wholly-owned subsidiary of Valentis. In connection with the Merger, each stockholder of the Company received, in exchange for each share of the Company’s 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 the Company’s 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 Company’s stockholders.

 

The Merger Agreement was approved by the stockholders of the Company at a meeting of the Company's stockholders on June 28, 2007.  At the meeting, the Company’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 the Company 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 the Company.

 

On July 26, 2007, the Board of Directors of Valentis, Inc. 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, Valentis, Inc. changed its name to Urigen Pharmaceuticals, Inc. and began trading on the OTC Bulletin Board under the stock symbol URGP.

 

 

F-22

---

 

 

Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

12.	Subsequent Events, continued

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. Urigen Pharmaceuticals received aggregate proceeds of $1,817,000, which is 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 a maximum price of $0.15 per share, subject to certain adjustments, other than for an 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.

 

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 Warrant to purchase 14,000,000 shares of the Company's common stock at $0.18 per share. 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 there under. These limitations may be waived upon 61 days notice to the Company.

 

F-23

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Urigen N.A., Inc.

(formerly Urigen Holdings, Inc.)

(a development stage enterprise)

Notes to Financial Statements

______________

 

 

12.	Subsequent Events, continued

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 Securities and Exchange Commission (“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 further extended the time to file until October 15, 2007 without penalty.  The Company filed a registration statement with the SEC on October 12, 2007 and is awaiting approval by the SEC.

 

·	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 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.

 

F-24

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