10-K 1 form10k.htm URIGEN PHARMACEUTICALS, INC. FORM 10-K form10k.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
  Washington, DC 20549
 
FORM 10-K
 
ý              Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
For the fiscal year ended June 30, 2009
 
Commission File Number 0-22987
 
Urigen Pharmaceuticals, Inc.
 (Exact Name of Registrant as Specified in Its Charter)

  Delaware
  
94-3156660
(State or Other Jurisdiction of Incorporation or
Organization)
  
(IRS Employer Identification No.)
     
27 Maiden Lane, Suite 595, San Francisco, CA
  
94108
(Address of Principal Executive Offices)
  
(Zip Code)
 
(415) 781-0350
 
 (Registrant’s Telephone Number Including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.001
 
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   o    No   x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes   o    No   x
 
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    ý     No    o
 
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein and will not be contained, to be best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this for 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer o     Accelerated filer o 
       
Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company x
 
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based upon the closing sales price of the Common Stock on September 23, 2009 was $ 4.41 Million.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No    ý
 
The number of outstanding shares of the registrant’s common stock, $0.001 par value, was 73,494,327 as of September 22, 2009.
 

 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 
 
1
 
 
 
URIGEN PHARMACEUTICALS, INC.
 
FOR THE YEAR ENDED JUNE 30, 2009
 
TABLE OF CONTENTS

       
Page
PART I
        
Item 1
  
Business 
  
3
Item 1A
  
Risk Factors
  
11
Item 1B
  
Unresolved Staff Comments
  
22
Item 2
  
Properties
  
22
Item 3
  
Legal Proceedings
  
22
Item 4
  
Submission of Matters to a Vote of Security Holders
  
22
PART II
        
Item 5
  
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  
23
Item 6
  
Selected Financial Data
  
24
Item 7
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations      
  
25
Item 7A
  
Quantitative and Qualitative Disclosures About Market Risk
  
33
Item 8
  
Financial Statements and Supplementary Data
  
33
Item 9
  
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     
  
33
Item 9A(T)
  
Controls and Procedures
  
33
Item 9B
  
Other Information
  
34
PART III
        
Item 10
  
Directors and Executive Officers of the Registrant
  
35
Item 11
  
Executive Compensation
  
38
Item 12
  
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   
  
40
Item 13
  
Certain Relationships and Related Transactions, and Director Independence
  
40
Item 14
  
Principal Accountant Fees and Services
  
41
PART IV
        
Item 15
  
Exhibits and Financial Statement Schedules
  
42
SIGNATURES
  
43
 

 
2
 

 

PART I
 
ITEM 1.
BUSINESS
 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements containing the words “believes,” “anticipates,” “expects,” “intends,” “projects,” “will,” and other words of similar import or the negative of those terms or expressions. Forward-looking statements in this report include, but are not limited to, expectations of future levels of research and development spending, general and administrative spending, levels of capital expenditures and operating results, sufficiency of our capital resources, our intention to pursue and consummate strategic opportunities available to us, including sales of certain of our assets. Forward-looking statements subject to certain known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to, those described in Part I, “Item 1A. Risk Factors” of 10-K reports filed with the Securities and Exchange Commission and those described from time to time in our future reports filed with the Securities and Exchange Commission.
 
CORPORATE OVERVIEW

We were formerly known as Valentis, Inc. and were formed as the result of the merger of Megabios Corp. and GeneMedicine, Inc. in March 1999. We were incorporated in Delaware on August 12, 1997. In August 1999, we acquired U.K.-based PolyMASC Pharmaceuticals plc.

On October 5, 2006, we entered into an Agreement and Plan of Merger, as subsequently amended (the “Merger”) with Urigen N.A., Inc., a Delaware corporation (“Urigen N.A.”), and Valentis Holdings, Inc., our newly formed wholly-owned subsidiary (“Valentis Holdings”). Pursuant to the Merger Agreement, on July 13, 2007, Valentis Holdings was merged with and into Urigen N.A., Inc. with Urigen N.A., Inc. surviving as our wholly-owned subsidiary. In connection with the Merger, each Urigen stockholder received, in exchange for each share of Urigen N.A. common stock held by such stockholder immediately prior to the closing of the Merger, 2.2554 shares of our common stock. At the effective time of the Merger, each share of Urigen N.A Series B preferred stock was exchanged for 11.277 shares of our common stock. An aggregate of 51,226,679 shares of our common stock were issued to the Urigen N.A. stockholders.  Upon completion of the Merger, we changed our name from Valentis, Inc. to Urigen Pharmaceuticals, Inc. (the "Company").

From and after the Merger, our business is conducted through our wholly owned subsidiary Urigen N.A. The discussion of our business in this annual report is that of our current business which is conducted through Urigen N.A.
 
We are located in San Francisco, California, where our headquarters and business operations are located.
 

BUSINESS OVERVIEW
 
We specialize in the development of innovative products for patients with urological ailments including, specifically, the development of innovative products for amelioration Painful Bladder Syndrome/Interstitial Cystitis (“PBS” or “PBS/IC”), Urethritis, Nocturia and Overactive Bladder (“OAB”).
 
Urology represents a specialty pharmaceutical market of approximately 12,000 physicians in North America. Urologists treat a variety of ailments of the urinary tract including urinary tract infections, bladder cancer, overactive bladder, urgency and incontinence and interstitial cystitis, a subset of PBS. Many of these indications represent significant, underserved therapeutic market opportunities.
 
Over the next several years a number of key demographic and technological factors should accelerate growth in the market for medical therapies to treat urological disorders, particularly in our product categories. These factors include the following:
 
 
·
Aging population. The incidence of urological disorders increases with age. The over-40 age group in the United States is growing almost twice as fast as the overall population. Accordingly, the number of individuals developing urological disorders is expected to increase significantly as the population ages and as life expectancy continues to rise.
 
 
·
Increased consumer awareness. In recent years, the publicity associated with new technological advances and new drug therapies has increased the number of patients visiting their urologists to seek treatment for urological disorders.
 
 
 
3
 
 
 Urigen’s two clinical stage products target significant unmet medical needs with meaningful market opportunities in urology:
  • URG101, a bladder instillation for Painful Bladder Syndrome/Interstitial Cystitis (PBS/IC)
  • URG301, a female urethral suppository for urethritis and nocturia
URG101 targets Painful Bladder Syndrome/Interstitial Cystitis (“PBS” or “PBS/IC”) which affects approximately 10.5 million men and women in North America.  URG101 is a unique, proprietary combination therapy of components that is locally delivered to the bladder for rapid relief of pain and urgency as demonstrated in Urigen’s positive Phase II Pharmacodynamic Crossover study.

URG301 targets urethritis and nocturia, typically seen in overactive bladder patients. URG301 is a proprietary dosage form of an approved drug that is locally delivered to the female urethra. Urethritis pain commonly occurs with urinary tract infections (UTIs) which cause more than 8 million visits to the doctor annually. Nocturia, or nighttime urgency and frequency, is secondary to overactive bladder and can severely impact quality of life by disrupting the normal sleep pattern.

The novel urethral suppository platform presents excellent opportunities for effective product lifecycle management.  As market penetration of URG301 deepens, line extensions will be available through alternate generic drugs as well as new chemical entities.  To further expand the pipeline, the Company will identify and prioritize both marketed and development-stage products for acquisition.  The commercial opportunity for such candidates will benefit significantly from the synergy provided by URG101 and URG301 in the urology marketplace.
 
We are seeking a world wide partner for URG101 to complete it’s development and commercialization. We had planned to market our products to urologists and urogynecologists in the United States via a specialty sales force managed internally.
 
 POTENTIAL PRODUCTS, TECHNOLOGIES AND SERVICES
 
Following is a description of our products currently in development, the anticipated market for such products as well as the competitive environment in these markets.
 
Proprietary Product Candidates:
 
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 18% 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. 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.
 
In May of 2009, the RAND Corporation reported a survey of 100,000 households in the U.S. and estimated that there are 3.4 to 7.9 million women in the U.S. with interstitial cystitis. We had estimated that the prevalence of PBS in North America 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 Drs. Matt T. Rosenberg and Matthew Hazzard at the Mid-Michigan Health Centers. Each group independently concluded that the number of subjects with interstitial cystitis has been significantly underestimated. They evaluated over 1,000 female primary care patients over the course of a year using a pain, urgency/frequency questionnaire to categorize subjects as symptomatic or not. We calculated the North America PBS population based on a cutoff score of 13 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.
 
 
 
4
 
 
 
Product Development
 
We have licensed the URG101 technology from the University of California, San Diego. The license agreement is exclusive with regard to patent rights and non-exclusive with regard to the written technical information. We may also grant a sublicense to third parties. Pursuant to the license agreement, which was effective as of January 18, 2006, we were required to pay a license issue fee in the form of 7.5% of Urigen N.A. authorized common stock, and we were required to pay (i) license maintenance fees of $15,000 per year which was amended on December 22, 2008 as follows: (a) $5,000 payable on May 6, 2009, (b) $15,000 payable on June 6, 2009, $20,000 payable on June 6, 2010 and $25,000 payable on June 6, 2011 and annually thereafter on each anniversary until the Company is commercially selling the licensed product. On August 24, 2009, the license maintenance fees were amended again to provide (a) partial consideration and in lieu of cash for license maintenance fees that were due on May 6, 2009 and June 6, 2009, and require the Company to issue 250,000 shares of its common stock to the University, (b) $20,000 payable on June 6, 2010 and $25,000 payable on June 6, 2011 and annually thereafter on each anniversary until the Company is commercially selling the licensed product, (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.
 
Clinical Trial Status
 
Urigen filed an investigational new drug application (“IND”) in 2005 and has undertaken two (2) clinical studies to date: URG101-101 and URG101-104. The results of the most recent study, URG101-104, have been announced with primary and secondary endpoints all achieving statistical significance. The URG101-104 study was designed using lessons learned from the URG101-101 study which did not achieve statistical significance on the primary endpoint at 3 weeks, but did demonstrate that the URG101 product was safe and resulted in an acute reduction in urgency (P=0.006) and trend towards reduction in bladder pain (P=0.093).

The URG101-104 study was a pharmacodynamic crossover study to evaluate the time course of response to URG101 drug and placebo in subjects experiencing acute symptoms of painful bladder syndrome/interstitial cystitis.  In March 2008 an un-blinded interim analysis was conducted. Primary and secondary efficacy measurements in the study demonstrated that URG101 was significantly better than placebo. Top line data analysis findings include: primary endpoint - improvement in average daytime pain (p=0.03); secondary endpoints - improvement in daytime urgency (p=0.03), total symptom score (p=0.03), improved overall symptom relief as measured by PORIS (p=0.01).
 
Competitive Landscape
 
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.
 
 
 
5
 
 
  
Commercialization Plan
 
Remaining a virtual company, Urigen will commercialize URG101 in the United States by collaborating with appropriate commercial  partners and vendors to conduct a situational analysis of the United States; develop an appropriate product strategy; and then, create and implement a launch plan.
 
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 Urethritis and Nocturia
 
A significant percentage of female patients presenting with Urinary Tract Infections (UTI) and Painful Bladder Syndrome have a substantial urethral component to their disease. There are approximately 8 million doctor visits annually for urinary tract infections alone. The severity of their urethral pain and discomfort may compromise the administration of intravesical therapies while the antibiotics used to treat their UTI do not address their urethral pain. To overcome this problem, Urigen is developing a urethral suppository to resolve this pain and discomfort.
 
Nocturia, frequent nighttime urination, is a symptom of an underlying condition or disease, such as PBS.  A poll conducted by the National Sleep Foundation in 2003 reported that nearly two-thirds of adults between the ages of 55 and 84 suffered from nocturia.  The International Continence Society defines nocturia as two or more night time voids.  In its simplest terms, nocturia refers to urination at night and entails some degree of impairment, with urinary frequency often considered excessive and disruptive.  Patients with severe nocturia may get up five or more times per night to go to the bathroom to void.
 
Preliminary work, by Kalium, Inc., from which we licensed the product, has been conducted to test a variety of generally recognized as safe (“GRAS”) approved carriers and therapeutic agents as well as to optimize melt times for the suppository. Additionally, patients with urethritis were offered the use of a suppository that contained lidocaine and heparin for the treatment of their symptoms of urethral pain and inflammation. An optimized formulation has been tested in an open-label clinical trial. This study was undertaken to determine the proportion of urethral symptoms by 50% or more in patients with urethritis. Results were evaluated 15 minutes after administration of the suppository using the patient overall rating of improvement of symptoms (“PORIS”) scale.  The result of this pilot Phase II (open label) study in approximately 30 patients demonstrated a 50% or greater improvement in 83% of patients experiencing pain and 84% of patients experiencing urgency related to urethritis following a single treatment. Importantly, 50% of patients had complete resolution of pain and 63% had complete resolution of urgency. Duration of relief following a single treatment was greater than 12 hours in approximately 30% of subjects. This testing was not performed as a formal clinical trial, but under physician care and information provided to us from Kalium, Inc. Clinical development of URG301 will be similar to that of lidocaine jelly which is approved for urethritis.
 
 
 
6
 
 
 
The licensed patents cover a range of active ingredients that can be formulated in the suppository to create a desired therapeutic effect. Such agent may include antibiotics, antimicrobials, antifungals, analgesics, anesthetics, steroidal anti-inflammatories, non-steroidal anti-inflammatories, mucous production inhibitors, hormones and antispasmodics.

Market Opportunity for Treatment of Overactive Bladder (“OAB”)
 
According to an article published by the Mayo Foundation for Medical Education and Research, overactive bladder is a fairly common malady as approximately 17 million individuals in the United States and more than 100 million worldwide are afflicted. Importantly, the condition worsens as people age.
 
Although not life-threatening, for the individual overactive bladder is inconvenient, potentially embarrassing, and may disrupt sleep; while significantly impacting quality of life. Frequently these individuals are afraid to leave their home, or are unable to participate in a lengthy meeting, dinner, or social event. Unfortunately, many of these people hesitate to seek treatment because they think their symptoms are a normal part of aging. This mindset is incorrect as overactive bladder is not normal, is treatable, and treatment can significantly ease symptoms and improve quality of life.
 
Patient compliance studies report that more than half of patients taking an oral OAB drug stop taking it within six months of initiation of therapy. Such studies also report that only 10 to 20 percent of people remain on an oral OAB medicine six to 12 months after initiating treatment. About a third to one-half of those who discontinue their drug therapy do so due to side effects, they simply can not tolerate the drug or do not find the minimal benefit they receive to outweigh the negative effects of the drug.
 
Manufacturers of these overactive bladder therapies have expended significant research energy and money in their efforts to reduce side effects to increase patients’ adherence to treatment. However, some physicians, experts and healthcare providers do not believe that the marginal benefits of these oral agents outweigh the significant side effects endured by patients prescribed such drugs.
 
Importantly, given these efficacy and side effect limitations, the overactive bladder market has experienced significant and constant double digit annual growth. According to sales data provided by the four largest U.S. pharmaceutical companies in their annual reports, we estimate that in the five year period 2000 through 2004, sales of OAB drugs in the United States grew from $636 million to more than $1.3 billion, and year over year percentage increases for this five year period were 40%, 25%, 18%, and 13%, respectively.
 
Product Development
 
We are developing an IND to initiate an exploratory study to evaluate the safety and efficacy of an intraurethral suppository to treat urethritis, nocturia and the symptoms of acute urinary urgency associated with overactive bladder. The study will enroll subjects randomized to drug vs. placebo in a 1:1 ratio to evaluate the safety and efficacy of URG301 for one or more of these disorders.
 
Commercialization Plan
 
Although we are seeking a world wide partner for URG101, we will commercialize URG301 in the United States by conducting a situational analysis of the United States; developing an appropriate product strategy; and then, creating and implementing a launch plan that incorporates the 75 to 100 member sales organization that we are planning to establish for the launch of URG101. As appropriate, co-promotional agreements will be established with interested parties to ensure that URG301 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. Discussions to acquire such rights will be scheduled with interested pharmaceutical companies who have a strategic interest in Incontinence and Overactive Bladder, and have the requisite infrastructure and resources to successfully commercialize URG301.

Competitive Landscape
 
Approved prescription drugs used to treat overactive bladder are not optimally effective and have side effects that can limit their use. These approved drugs—oxybutynin (Ditropan®, Ditropan XL® and Oxytrol®, a skin patch); tolterodine (Detrol®, Detrol LA®); trospium (Sanctura®); solifenacin (Vesicare®); and darifenacin (Enablex®)—demonstrate remarkably similar efficacy.
 
However, they do differ in the side effects they cause and their cost. Side effects include dry mouth, constipation, and mental confusion. In clinical studies, Ditropan XL, Detrol LA, Oxytrol, Sanctura, Vesicare, and Enablex have caused fewer side effects than the short acting dosage forms of oxybutynin (Ditropan) and tolterodine (Detrol).
 
Oxybutynin has been available since 1976 and tolterodine since 1998. The short-acting form of oxybutynin is available as a less expensive generic drug while the extended-release formulations of both oxybutynin and tolterodine are available, but not as generics. An oxybutynin patch (Oxytrol) was launched in 2003 while solifenacin and darifenacin were introduced in 2004.
 
Retail prices for these products vary considerably and are tied directly to the number of pills taken per day and whether or not the product is available generically. The least expensive is generic oxybutynin 5mg with an average monthly cost of $20 compared to Ditropan 5mg at $79 and Ditropan XL 5mg costing $122 per month on average. The average monthly cost for Detrol is $138; Detrol LA $119; Sanctura $116; Vesicare $121; and Enablex $116. (Prices from May 2006 Wolters Kluwer Health, Pharmaceutical Audit Suite).
 
CORPORATE COLLABORATIONS
 
We retained Navigant Consulting, Inc. to conduct a situational assessment of physicians, healthcare payers and patient advocacy groups to generate a product strategy that addressed key geographical markets, customers, product positioning, lifecycle management and pricing. The project cost of this first phase was $125,000, of which $86,000 had been paid through June 30, 2009.

Life Science Strategy Group LLC (LSSG) was retained to create and implement a commercialization plan specific for us in the United States. Pursuant to the terms of the agreement, LSSG billed us for all professional services at established hourly rates, plus related out-of-pocket expenses. Payment of invoices is not contingent upon results. LSSG may terminate the agreement if payment of fees is not made within 45 days of receipt of the invoice. 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.  As of June 30, 2009 LSSG had invoiced the Company $28,000.  $3,000 was paid in cash.  LSSG principals have agreed to accept 147,059 shares of subscribed common stock at $0.17 per share in lieu of the remaining $25,000.
 
 
 
 
7
 

 
We also have two license agreements pursuant to which we license certain patent rights and technologies:

In January 2006, Urigen N.A. entered into an asset-based transaction agreement with a related party, Urigen, Inc. Simultaneously, Urigen N.A. entered into a license agreement with the University of California, San Diego (“UCSD”), for certain patent rights.   In exchange for this license, Urigen N.A. issued 1,846,400 common shares and is required to make annual maintenance payments of $15,000 which was amended on December 22, 2008 as follows: (a) $5,000 payable on May 6, 2009, (b) $15,000 payable on June 6, 2009, (c) $20,000 payable on June 6, 2010 and (d) $25,000 payable on June 6, 2011 and annually thereafter on each anniversary until the Company is commercially selling the licensed product, and milestone payments of up to $625,000, which are based on certain events related to FDA approval. On August 24, 2009, the license maintenance fees were amended to provide (a) partial consideration and in lieu of cash for license maintenance fees that were due on May 6, 2009 and June 6, 2009, and required the Company to issue 250,000 shares of its common stock to the UCSD. All remaining annual maintenance fees remain the same. As of June 30, 2009, $25,000 of milestone payments has been incurred. Urigen is also required to make royalty payments of 1.5-3.0% of net sales of licensed products, with a minimum annual royalty of $35,000. The term of the agreement ends on the earlier of the expiration of the longest-lived of the patents rights or the tenth anniversary of the first commercial sale. Either party may terminate the license agreement for cause in the event that the other party commits a material breach and fails to cure such breach. In addition, Urigen may terminate the license agreement at any time and for any reason upon a 90-day written notice.

Pursuant to our license agreement with Kalium, Inc., made as of May 12, 2006, the Company and our affiliates have an exclusive license to the patent rights and technologies, and the right to sublicense to third parties. As partial consideration for the rights under the license agreement and as a license fee, Urigen N.A., Inc. was required to issue 1,623,910 shares of our common stock. We are required to pay royalties ranging from 2.0% to 4.5% of net sales, and milestone payments of up to $457,500 upon the occurrence of certain events related to FDA approval, and any applicable sublicense payments in an amount equal to 22.5% of fees received for any sublicense. Pursuant to the terms of the license agreement, we must indemnify Kalium against any and all liabilities or damages arising out of the development or use of the licensed products or technology, the use by third parties of licensed products or technology, or any representations or warranty by us. In the event that any licensed product becomes the subject of a third-party claim, we have the right to conduct the defense at our own expense, and may settle claims in our sole discretion; provided, however, that Kalium must cooperate with us. The term of the license agreement ends on the earlier of the expiration date of the last to expire of any patent or the tenth anniversary of the first commercial sale. The license agreement may be terminated by either party if the other party fails to substantially perform or otherwise materially breaches any material terms or covenants of the agreement, and such failure or breach is not cured within 30 days of notice thereof. In addition, Kalium may terminate the agreement or convert the license to non-exclusive rights if we fail to meet certain milestones over the next three years.  On November 10, 2008, Kalium amendment the May 2006 license agreement extending the time period from three years to four years for the time period to complete a clinical trial or license the product in a territory.

In countries outside of the United States, we anticipate we will either assign licensing rights to or establish supply and distribution agreements with interested parties. Initial discussions to acquire such rights have begun with interested parties who have a strategic interest in urology and painful bladder syndrome and have the requisite infrastructure and resources to successfully commercialize URG101.
 
Like many companies our size, we do not have the ability to conduct preclinical or clinical studies for our product candidates without the assistance of third parties who conduct the studies on our behalf. These third parties are usually toxicology facilities and clinical research organizations (“CROs”) that have significant resources and experience in the conduct of pre-clinical and clinical studies. The toxicology facilities conduct the pre-clinical safety studies as well as all associated tasks connected with these studies. The CROs typically perform patient recruitment, project management, data management, statistical analysis, and other reporting functions.
 
Third parties that we use, and have used in the past, to support clinical trials include Clinimetrics, Research Canada, Inc., EMB Statistical Solutions, LLC (“EMB”), and Hyaluron. Inc. (“HCM”).
 
Pursuant to a purchase order dated September 2007, HCM has provided us with services related to documentation and drug development.  Various services were provided by the other vendors listed.
 
We intend to continue to rely on third parties to conduct clinical trials of our product candidates and to use different toxicology facilities and CROs for all of our pre-clinical and clinical studies.
 
INTELLECTUAL PROPERTY
 
We have multiple intellectual property filings around our products. In general, we plan to file for broad patent protection in all markets where we intend to commercialize our products. Typically, we will file our patents first in the United States or Canada and expand the applications internationally under the Patent Cooperation Treaty, or PCT.
 
Currently, we own or have licensed three (3) issued patents and three (3) patent applications. Based on these filings, we anticipate that our lead product URG101, may be protected until at least 2026 and our URG300 urethral suppository platform including URG301 will be protected until at least 2018 and potentially beyond 2025.
 
 
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Summary of our Patents and Patent Applications for URG101 and URG301 Product Development:
 
1)
(URG101) We have licensedU.S. Patent 7,414,039 entitled “Novel Interstitial Therapy for Immediate Symptom Relief and Chronic Therapy in Interstitial Cystitis” from the University of California San Diego. The patent claims treatment formulations and methods for reducing the symptoms of urinary frequency, urgency and/or pelvic pain, including interstitial cystitis.
 
2)
(URG101) 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.
 
3)
(URG301) We have licensedU.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.
 
4)
(URG301) We have licensedU.S. Patent No. 7,267,670 entitled “Reinforced Urethral Suppository” from Kalium, Inc. This application covers the mechanical structure of a reinforced suppository that can be used to deliver a range of therapeutic agents to the urethra.
 
5)
(URG301)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
 
6)
(URG301) We have filed PCT Application 60/891,454 entitled "Urethral Suppositories for Overactive Bladder" which is directed to the use of mixed-activity anti-cholinergic agents to treat the symptoms of overactive bladder.

Our failure to obtain patent protection or otherwise protect our proprietary technology or proposed products may have a material adverse effect on our competitive position and business prospects. The patent application process takes several years and entails considerable expense. There is no assurance that additional patents will issue from these applications or, if patents do issue, that the claims allowed will be sufficient to protect our technology.
 
The patent positions of pharmaceutical and biotechnology firms are often uncertain and involve complex legal and factual questions. Furthermore, the breadth of claims allowed in biotechnology patents is unpredictable. We cannot be certain that others have not filed patent applications for technology covered by our pending applications or that we were the first to invent the technology that is the subject of such patent applications. Competitors may have filed applications for, or may have received patents and may obtain additional patents and proprietary rights relating to compounds, products or processes that block or compete with ours. We are aware of patent applications filed and patents issued to third parties relating to urological drugs, urological delivery technologies and urological therapeutics, and there can be no assurance that any of those 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.
 
Patent litigation is widespread in the biotechnology industry. Litigation may be necessary to defend against or assert claims of infringement, to enforce patents issued to us, to protect trade secrets or know-how owned or licensed by us, or to determine the scope and validity of the proprietary rights of third parties. Although no third party has asserted that we are infringing such third party’s patent rights or other intellectual property, there can be no assurance that litigation asserting such claims will not be initiated, that we would prevail in any such litigation or that we would be able to obtain any necessary licenses on reasonable terms, if at all. Any such claims against us, with or without merit, as well as claims initiated by us against third parties, can be time-consuming and expensive to defend or prosecute and to resolve. If other companies prepare and file patent applications in the United States that claim technology also claimed by us, we may have to participate in interference proceedings to determine priority of invention which could result in substantial cost to us even if the outcome is favorable to us. There can be no assurance that third parties will not independently develop equivalent proprietary information or techniques, will not gain access to our trade secrets or disclose such technology to the public or that we can maintain and protect unpatented proprietary technology. We typically require our employees, consultants, collaborators, advisors and corporate partners to execute confidentiality agreements upon commencement of employment or other relationships with us. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our technology in the event of unauthorized use or disclosure of such information, that the parties to such agreements will not breach such agreements or that our trade secrets will not otherwise become known or be discovered independently by our competitors.
 
 
 
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GOVERNMENT REGULATION
 
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 (“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 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 (“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 (“GMP”), regulations. Manufacturers of drugs also must comply with the FDA’s general drug product standards and may also be subject to state regulation. Failure to comply with GMP or other applicable regulatory requirements may result in withdrawal of marketing approval, criminal prosecution, civil penalties, recall or seizure of products, warning letters, total or partial suspension of production, suspension of clinical trials, FDA refusal to review pending marketing approval applications or supplements to approved applications, or injunctions, as well as other legal or regulatory action against us or our corporate partners.
 
Clinical trials are conducted in three sequential phases, but the phases may overlap. In Phase I (the initial introduction of the product into human subjects or patients), the drug is tested to assess safety, metabolism, pharmacokinetics and pharmacological actions associated with increasing doses. Phase II usually involves studies in a limited patient population to (i) determine the efficacy of the potential product for specific, targeted indications, (ii) determine dosage tolerance and optimal dosage, and (iii) further identify possible adverse effects and safety risks. If a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further evaluate clinical efficacy and test for safety within a broader patient population at geographically dispersed clinical sites. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specific time period, if at all, with respect to any of our or our corporate partners’ potential products subject to such testing. In addition, after marketing approval is granted, the FDA may require post-marketing clinical studies that typically entail extensive patient monitoring and may result in restricted marketing of the product for an extended period of time.

The results of product development, preclinical animal studies, and human studies are submitted to the FDA as part of the NDA. The NDA must also contain extensive manufacturing information, and each manufacturing facility must be inspected and approved by the FDA before the NDA will be approved. Similar regulatory approval requirements exist for the marketing of drug products outside the United States (e.g., Europe and Japan). The testing and approval process is likely to require substantial time, effort and financial and human resources, and there can be no assurance that any approval will be granted on a timely basis, if at all, or that any potential product developed by us and/or our corporate partners will prove safe and effective in clinical trials or will meet all the applicable regulatory requirements necessary to receive marketing approval from the FDA or the comparable regulatory body of other countries. Data obtained from preclinical studies and clinical trials are subject to interpretations that could delay, limit or prevent regulatory approval. The FDA may deny the NDA if applicable regulatory criteria are not satisfied, require additional testing or information, or require post-marketing testing and surveillance to monitor the safety or efficacy of a product. Moreover, if regulatory approval of a biological product candidate is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Among the conditions for NDA approval is the requirement that the prospective manufacturer’s quality control and manufacturing procedures conform to the appropriate GMP regulations, which must be followed at all times. In complying with standards set forth in these regulations, manufacturers must continue to expend time, financial resources and effort in the area of production and quality control to ensure full compliance.
 
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.

GENERAL COMPETITION WITHIN THE UROLOGICAL THERAPEUTIC INDUSTRY
 
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. We face competition from such companies, in establishing corporate collaborations with pharmaceutical and biotechnology companies, relationships with academic and research institutions and in negotiating licenses to proprietary technology, including intellectual property.
 
 
 
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Many competitors and potential competitors have substantially greater product development capabilities and financial, scientific, manufacturing, managerial and human resources than we do. There is no assurance that research and development by such competitors will not render our potential products and technologies, or the potential products and technologies developed by our corporate partners, obsolete or non-competitive, or that any potential product and technologies us or our corporate partners develop would be preferred to any existing or newly developed products and technologies. In addition, there is no assurance that competitors will not develop safer, more effective or less costly PBS therapies, achieve superior patent protection or obtain regulatory approval or product commercialization earlier than us or our corporate partners, any of which could have a material adverse effect on our business, financial condition or results of operations.

PRODUCT LIABILITY INSURANCE
 
The manufacture and sale of human therapeutic products involve an inherent risk of product liability claims and associated adverse publicity. We currently do not have product liability insurance, and there can be no assurance that we will be able to 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, if any, could have a material adverse effect upon our business, financial condition and results of operations.
 
EMPLOYEES
 
We currently employ two individuals full-time, including one who holds a doctoral degree. 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.
 
 
ITEM 1A.
RISK FACTORS
 
The following risk factors outline certain risks and uncertainties concerning future results and should be read in conjunction with the information contained in this Annual Report on Form 10-K. Any of these risk factors could materially and adversely affect our business, operating results and financial condition. Additional risks and uncertainties not presently known to us, or those we currently deem immaterial, may also materially harm our business, operating results and financial condition.
 
We have received a “going concern” opinion from our independent registered public accounting firm, which may negatively impact our business.

We have received a report from Burr, Pilger & Mayer LLP, our independent registered public accounting firm, regarding our consolidated financial statements for the fiscal year ended June 30, 2009, which includes an explanatory paragraph stating that the financial statements were prepared assuming we will continue as a going concern. The report also stated that our recurring operating losses and need for additional financing have raised substantial doubt about our ability to continue as a going concern.

We identified material weaknesses in our internal control over financial reporting for the fiscal year ended June 30, 2009, resulting in our conclusion that our internal control over financial reporting and disclosure controls and procedures were ineffective. If we fail to maintain effective internal control over financial reporting and effective disclosure controls and procedures, we may not be able to accurately report our financial results or prevent fraud.

We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report of such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the Company’s internal control over financial reporting.
 
Our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, our management concluded that our internal control over financial reporting was ineffective as of June 30, 2009.  A material weakness, as defined in standards established by the Public Company Accounting Oversight Board (United States) is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
 
Based upon management’s assessment, we identified the following material weaknesses as of June 30, 2009:

            Management noted an insufficient quantity of experienced, dedicated resources involved in control activities and financial reporting. This material weakness contributed to a control environment where there is a reasonable possibility that a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.
 
           Management also noted that the Company’s design and operation of controls with respect to the process of preparing and reviewing the annual and interim financial statements are ineffective. This material weakness includes failures in the design and operating effectiveness of controls which would insure (i) preparation of financial statements and disclosures on a timely basis; (ii) that all journal entries and financial disclosures are thoroughly reviewed and approved internally and documentation of this review process is retained; (iii) adequate separation of duties in the reporting process, and (iv) timely reconciliation of balance sheet and expense accounts.  These control deficiencies could result in a material misstatement of the financial statements due to the significance of the financial closing and reporting process to the preparation of reliable financial statements.
 
We are implementing remediation steps to eliminate identified material weaknesses in our internal controls over financial reporting, including the following:

Management will continue to assess the weakness in insufficient quantity of experienced, dedicated resources in the control activities and financial reporting and hire the necessary resources as needed.  Management will also update its procedures for (1) the preparation of financial statements and disclosures; (2) the preparation and review of journal entries and financial disclosures; and (3) timely reconciliation of balance sheet and expense accounts.  Management has assessed that to have adequate separation in the reporting process, the Company would need to hire an additional full-time employee.  Until sufficient funds are raised by the Company, this weakness will continue to occur.
 
 
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In the future, an independent registered public accounting firm will be required to attest to and report on management’s assessment of the effectiveness of our system of internal control over financial reporting.  Despite our remediation efforts, our management may conclude that our system of internal control over our financial reporting is not effective.  Moreover, even if our management concludes that our system of internal control over financial reporting is effective, our independent registered public accounting firm may still decline to attest to our management’s assessment or may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated, or reviewed, or if it interprets the relevant requirements differently from us.
 
Our reporting obligations as a public company will place a significant strain on our management, operational, and financial resources and systems for the foreseeable future. An effective system of internal control is necessary for us to produce reliable financial reports and is important to help prevent fraud. As a result, our failure to achieve and maintain an effective system of internal control over financial reporting and effective disclosure controls and procedures could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock.  Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
 
We have a history of losses and may never be profitable.

We have engaged in research and development activities since our inception. We incurred losses from operations of approximately $1.8 million and $3.7 million, for our fiscal years ended June 30, 2009 and 2008, respectively. As of June 30, 2009, we had an accumulated deficit totaling approximately $11.9 million. Our products are in the development stage and, accordingly, our business operations are subject to all of the risks inherent in the establishment and maintenance of a developing business enterprise, such as those related to competition and viable operations management.    We have not generated revenues from the commercialization of any products. Our net operating losses over the near-term and the next several years are expected to continue as a result of the further clinical trial activity and preparation for regulatory submission necessary to support regulatory approval of our products. Costs associated with Phase III clinical trials are generally substantially greater than Phase II clinical trials, as the number of clinical sites and patients required is much larger.
 
There can be no assurance that we will be able to generate sufficient product revenue to become profitable at all or on a sustained basis. We expect to have quarter-to-quarter fluctuations in expenses, some of which could be significant, due to expanded research, development, and clinical trial activities.

Our potential products and technologies are in early stages of development.
 
The development of new pharmaceutical products is a highly risky undertaking, and there can be no assurance that any future research and development efforts we might undertake will be successful. All of our potential products will require extensive additional research and development prior to any commercial introduction. There can be no assurance that any future research and development and clinical trial efforts will result in viable products.
 
We do not yet have the required clinical data and results to successfully market our forerunner product, URG101, or any other potential product in any jurisdiction, and future clinical or preclinical results may be negative or insufficient to allow us to successfully market any of our product candidates. Obtaining needed data and results may take longer than planned or may not be obtained at all.

We are subject to substantial government regulation, which could materially adversely affect our business.
 
The production and marketing of our potential products and our ongoing research and development, pre-clinical testing and clinical trial activities are currently subject to extensive regulation and review by numerous governmental authorities in the United States and will face similar regulation and review for overseas approval and sales from governmental authorities outside of the United States. All of the products we are currently developing must undergo rigorous pre-clinical and clinical testing and an extensive regulatory approval process before they can be marketed. This process makes it longer, harder and more costly to bring our potential products to market, and we cannot guarantee that any of our potential products will be approved. The pre-marketing approval process can be particularly expensive, uncertain and lengthy, and a number of products for which FDA approval has been sought by other companies have never been approved for marketing. In addition to testing and approval procedures, extensive regulations also govern marketing, manufacturing, distribution, labeling, and record-keeping procedures. If we or our business partners do not comply with applicable regulatory requirements, such violations could result in non-approval, suspensions of regulatory approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions, injunctions, and criminal prosecution.
 
Withdrawal or rejection of FDA or other government entity approval of our potential products may also adversely affect our business. Such rejection may be encountered due to, among other reasons, lack of efficacy during clinical trials, unforeseen safety issues, inability to follow patients after treatment in clinical trials, inconsistencies between early clinical trial results and results obtained in later clinical trials, varying interpretations of data generated by clinical trials, or changes in regulatory policy during the period of product development in the United States and abroad. In the United States, there is stringent FDA oversight in product clearance and enforcement activities, causing medical product development to experience longer approval cycles, greater risk and uncertainty, and higher expenses. Internationally, there is a risk that we may not be successful in meeting the quality standards or other certification requirements. Even if regulatory approval of a product is granted, this approval may entail limitations on uses for which the product may be labeled and promoted, or may prevent us from broadening the uses of our current potential products for different applications. In addition, we may not receive FDA approval to export our potential products in the future, and countries to which potential products are to be exported may not approve them for import.
 
Manufacturing facilities for our products will also be subject to continual governmental review and inspection. The FDA has stated publicly that compliance with manufacturing regulations will continue to be strictly scrutinized. To the extent we decide to manufacture our own products, a governmental authority may challenge our compliance with applicable federal, state and foreign regulations. In addition, any discovery of previously unknown problems with one of our potential products or facilities may result in restrictions on the potential product or the facility. If we decide to outsource the commercial production of our products, any challenge by a regulatory authority of the compliance of the manufacturer could hinder our ability to bring our products to market.
 
From time to time, legislative or regulatory proposals are introduced that could alter the review and approval process relating to medical products. It is possible that the FDA or other governmental authorities will issue additional regulations which would further reduce or restrict the sales of our potential products. Any change in legislation or regulations that govern the review and approval process relating to our potential and future products could make it more difficult and costly to obtain approval for these products.

We rely on third parties to assist us in conducting clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates.
 
Like many companies our size, we do not have the ability to conduct preclinical or clinical studies for our product candidates without the assistance of third parties who conduct the studies on our behalf. These third parties are usually toxicology facilities and clinical research organization, or CROs that have significant resources and experience in the conduct of pre-clinical and clinical studies. The toxicology facilities conduct the pre-clinical safety studies as well as all associated tasks connected with these studies. The CROs typically perform patient recruitment, project management, data management, statistical analysis, and other reporting functions.
 
 
 
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Third parties that we use, and have used in the past, to support clinical development include Clinimetrics Research Canada, Inc., Cardinal Health PTS, LLC, Hyaluron, Inc. and EMB Statistical Solutions, LLC. We intend to continue to rely on third parties to conduct clinical trials of our product candidates and to use different toxicology facilities and CROs for all of our pre-clinical and clinical studies. 

 Our reliance on these third parties for development activities reduces our control over these activities. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed or terminated. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be required to replace them. Although we believe there are a number of third-party contractors we could engage to continue these activities, replacing a third-party contractor may result in a delay of the affected trial. Accordingly, we may not be able to obtain regulatory approval for or successfully commercialize our product candidates.
 
Delays in the commencement or completion of clinical testing of our product candidates could result in increased costs to us and delay our ability to generate significant revenues.
 
Delays in the commencement or completion of clinical testing could significantly impact our product development costs. We do not know whether current or planned clinical trials will begin on time or be completed on schedule, if at all. The commencement of clinical trials can be delayed for a variety of reasons, including delays in:
 
 
·
obtaining regulatory approval to commence a clinical trial;
 
 
·
reaching agreement on acceptable terms with prospective contract research organizations and clinical trial sites;
 
 
·
obtaining sufficient quantities of clinical trial materials for any or all product candidates;
   
 
·
obtaining institutional review board approval to conduct a clinical trial at a prospective site; and
 
 
·
recruiting participants for a clinical trial.
 
In addition, once a clinical trial has begun, it may be suspended or terminated by us or the FDA or other regulatory authorities due to a number of factors, including:
 
 
·
failure to conduct the clinical trial in accordance with regulatory requirements;
 
 
·
inspection of the clinical trial operations or clinical trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold; or
 
 
·
lack of adequate funding to continue the clinical trial.
 
Clinical trials require sufficient participant enrollment, which is a function of many factors, including the size of the target population, the nature of the trial protocol, the proximity of participants to clinical trial sites, the availability of effective treatments for the relevant disease, the eligibility criteria for our clinical trials and competing trials. Delays in enrollment can result in increased costs and longer development times. Our failure to enroll participants in our clinical trials could delay the completion of the clinical trials beyond current expectations. In addition, the FDA could require us to conduct clinical trials with a larger number of participants than we may project for any of our product candidates. As a result of these factors, we may not be able to enroll a sufficient number of participants in a timely or cost-effective manner.

Furthermore, enrolled participants may drop out of clinical trials, which could impair the validity or statistical significance of the clinical trials. A number of factors can influence the discontinuation rate, including, but not limited to: the inclusion of a placebo in a trial; possible lack of effect of the product candidate being tested at one or more of the dose levels being tested; adverse side effects experienced, whether or not related to the product candidate; and the availability of numerous alternative treatment options that may induce participants to discontinue from the trial.
 
We, the FDA or other applicable regulatory authorities may suspend clinical trials of a product candidate at any time if we or they believe the participants in such clinical trials, or in independent third-party clinical trials for drugs based on similar technologies, are being exposed to unacceptable health risks or for other reasons.
 
 
 
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We rely on third parties to manufacture sufficient quantities of compounds for use in our clinical trials and future commercial operations and an interruption to this service may harm our business.

        We rely on various third parties to manufacture the materials we use in our clinical trials and future commercial operations.  There can be no assurance that we will be able to identify, qualify and obtain prior regulatory approval for additional sources of clinical materials. If interruptions in this supply, as evidenced by the heparin recall in 2008, should occur for any reason, including a decision by the third parties to discontinue manufacturing, technical difficulties, labor disputes or a failure of the third parties to follow regulations, we may not be able to obtain regulatory approvals to successfully commercialize our investigational product candidates.

        We have contracted with a third party vendor to develop the individual vials contained in our URG101 kit. This vendor will be our sole-source of clinical supplies for URG101. There can be no assurance that the final vial formulations will result in sufficient safety and efficacy for approval. A failure on the stability or manufacturability of our individual vial formulations or the inability of this vendor to carry out its contractual duties or meet expected timelines could cause our URG101 clinical studies to be delayed which may have a material adverse impact on our development plan, stock price and financial condition.

We do not have commercial-scale manufacturing capability, and we lack commercial manufacturing experience.
 
If we are successful in achieving regulatory approval and developing the markets for our potential products, we would have to arrange for the scaled-up manufacture of our products. At the present time, we have not arranged for the large-scale manufacture of our products. There can be no assurance that we will, on a timely basis, be able to make the transition from manufacturing clinical trial quantities to commercial production quantities successfully or be able to arrange for contract manufacturing. We believe one or more contractors will be able to manufacture our products for initial commercialization if the products obtain FDA and other regulatory approvals. Potential difficulties in manufacturing our products, including scale-up, recalls or safety alerts, could have a material adverse effect on our business, financial condition, and results of operations.
 
Our products can only be manufactured in a facility that has undergone a satisfactory inspection by the FDA and other relevant regulatory authorities. For these reasons, we may not be able to replace manufacturing capacity for our products quickly if we or our contract manufacturer(s) are unable to use manufacturing facilities as a result of a fire, natural disaster (including an earthquake), equipment failure, or other difficulty, or if such facilities were deemed not in compliance with the regulatory requirements and such non-compliance could not be rapidly rectified. An inability or reduced capacity to manufacture our products would have a material adverse effect on our business, financial condition, and results of operations.
 
We expect to enter into definitive and perhaps additional arrangements with contract manufacturing companies in order to secure the production of our products or to attempt to improve manufacturing costs and efficiencies. If we are unable to enter into definitive agreements for manufacturing services and encounters delays or difficulties in finalizing or otherwise establishing relationships with manufacturers to produce, package, and distribute our products, then market introduction and subsequent sales of such products would be adversely affected.
 
If we fail to obtain acceptable prices or appropriate reimbursement for our products, our ability to successfully commercialize our products will be impaired.
 
Government and insurance reimbursements for healthcare expenditures play an important role for all healthcare providers, including physicians and pharmaceutical companies such as ours, which plan to offer various products in the United States and other countries in the future. Our ability to earn sufficient returns on our potential products will depend in part on the extent to which reimbursement for the costs of such products will be available from government health administration authorities, private health coverage insurers, managed care organizations, and other organizations. In the United States, our ability to have our products eligible for Medicare, Medicaid or private insurance reimbursement will be an important factor in determining the ultimate success of our products. If, for any reason, Medicare, Medicaid or the insurance companies decline to provide reimbursement for our products, our ability to commercialize our products would be adversely affected. There can be no assurance that our potential drug products will be eligible for reimbursement.
 
There has been a trend toward declining government and private insurance expenditures for many healthcare items. Third-party payers are increasingly challenging the price of medical and pharmaceutical products.
 
If purchasers or users of our products and related treatments are not able to obtain appropriate reimbursement for the cost of using such products, they may forgo or reduce such use. Even if our products are approved for reimbursement by Medicare, Medicaid and private insurers, of which there can be no assurance, the amount of reimbursement may be reduced at times, or even eliminated. This would have a material adverse effect on our business, financial condition and results of operations.
 
Significant uncertainty exists as to the reimbursement status of newly approved pharmaceutical products, and there can be no assurance that adequate third-party coverage will be available.
 
We have limited sales, marketing and distribution experience.
 
We have very limited experience in the sales, marketing, and distribution of pharmaceutical products. There can be no assurance that we will be able to establish sales, marketing, and distribution capabilities or make arrangements with our current collaborators or others to perform such activities or that such effort will be successful. If we decide to market any of our products directly, we must either acquire or internally develop a marketing and sales force with technical expertise and with supporting distribution capabilities. The acquisition or development of a sales, marketing and distribution infrastructure would require substantial resources, which may not be available to us or, even if available, divert the attention of our management and key personnel, and have a negative impact on further product development efforts.
 
 
 
14
 
 
 
We intend to seek additional collaborative arrangements to develop and commercialize our products. These collaborations, if secured, may not be successful.
 
We intend to seek additional collaborative arrangements to develop and commercialize some of our potential products, including URG101 in North America and Europe. There can be no assurance that we will be able to negotiate collaborative arrangements on favorable terms or at all or that our current or future collaborative arrangements will be successful.
 
Our strategy for the future research, development, and commercialization of our products is based on entering into various arrangements with corporate collaborators, licensors, licensees, health care institutions and principal investigators and others, and our commercial success is dependent upon these outside parties performing their respective contractual obligations responsibly and with integrity. The amount and timing of resources such third parties will devote to these activities may not be within our control. There can be no assurance that such parties will perform their obligations as expected. There can be no assurance that our collaborators will devote adequate resources to our products.
 
If our product candidates do not gain market acceptance, we may be unable to generate significant revenues.
 
Even if our products are approved for sale, they may not be successful in the marketplace. Market acceptance of any of our products will depend on a number of factors, including demonstration of clinical effectiveness and safety; the potential advantages of our products over alternative treatments; the availability of acceptable pricing and adequate third-party reimbursement; and the effectiveness of marketing and distribution methods for the products. If our products do not gain market acceptance among physicians, patients, and others in the medical community, our ability to generate significant revenues from our products would be limited.
  
If we are not successful in acquiring or licensing additional product candidates on acceptable terms, if at all, our business may be adversely affected.
 
As part of our strategy, we may acquire or license additional product candidates for treatment of urinary tract disorders. We may not be able to identify promising urinary tract product candidates. Even if we are successful in identifying promising product candidates, we may not be able to reach an agreement for the acquisition or license of the product candidates with their owners on acceptable terms or at all.
 
We intend to in-license, acquire, develop and market additional products and product candidates so that we are not solely reliant on URG101 and URG301 sales for our revenues. Because we have limited internal research capabilities, we are dependent upon pharmaceutical and biotechnology companies and other researchers to sell or license products or technologies to us. The success of this strategy depends upon our ability to identify, select and acquire the right pharmaceutical product candidates, products and technologies.
 
We may not be able to successfully identify any other commercial products or product candidates to in-license, acquire or internally develop. Moreover, negotiating and implementing an economically viable in-licensing arrangement or acquisition is a lengthy and complex process. Other companies, including those with substantially greater resources, may compete with us for the in-licensing or acquisition of product candidates and approved products. We may not be able to acquire or in-license the rights to additional product candidates and approved products on terms that we find acceptable, or at all. If we are unable to in-license or acquire additional commercial products or product candidates, we may be reliant solely on URG101 and URG301 sales for revenue. As a result, our ability to grow our business or increase our profits could be severely limited.
 
If our efforts to develop new product candidates do not succeed, and product candidates that we recommend for clinical development do not actually begin clinical trials, our business will suffer.
 
We intend to use our proprietary licenses and expertise in urethral tract disorders to develop and commercialize new products for the treatment and prevention of urological disorders. Once recommended for development, a candidate undergoes drug substance scale up, preclinical testing, including toxicology tests, and formulation development. If this work is successful, an IND, would need to be prepared, filed, and approved by the FDA and the product candidate would then be ready for human clinical testing.
 
The process of developing new drugs and/or therapeutic products is inherently complex, time-consuming, expensive and uncertain. We must make long-term investments and commit significant resources before knowing whether our development programs will result in products that will receive regulatory approval and achieve market acceptance. Product candidates that may appear to be promising at early stages of development may not reach the market for a number of reasons. In addition, product candidates may be found ineffective or may cause harmful side effects during clinical trials, may take longer to progress through clinical trials than had been anticipated, may not be able to achieve the pre-defined clinical endpoint due to statistical anomalies even though clinical benefit was achieved, may fail to receive necessary regulatory approvals, may prove impracticable to manufacture in commercial quantities at reasonable cost and with acceptable quality, or may fail to achieve market acceptance. To date, our development efforts have been focused on URG101 for PBS/IC. While we have experience in developing urethral suppositories, our development efforts for URG301 have just begun. There can be no assurance that we will be successful with the limited knowledge and resources we have available at the present time.
 
 
 
15
 
 

 
 All of our product candidates are in preclinical or clinical development and have not received regulatory approval from the FDA or any foreign regulatory authority. An IND has been filed and is effective for URG101 for the treatment of painful bladder syndrome/interstitial cystitis, which has completed a positive Phase II clinical trial; however, an IND has not been filed for URG301. Typically, the regulatory approval process is extremely expensive, takes many years to complete and the timing or likelihood of any approval cannot be accurately predicted.
 
As part of the regulatory approval process, we must conduct preclinical studies and clinical trials for each product candidate to demonstrate safety and efficacy. The number of preclinical studies and clinical trials that will be required varies depending on the product candidate, the indication being evaluated, the trial results and regulations applicable to any particular product candidate.
 
The results of preclinical studies and initial clinical trials of our product candidates do not necessarily predict the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through initial clinical trials. We cannot assure you that the data collected from the preclinical studies and clinical trials of our product candidates will be sufficient to support FDA or other regulatory approval. In addition, the continuation of a particular study after review by an institutional review board or independent data safety monitoring board does not necessarily indicate that our product candidate will achieve the clinical endpoint.
 
The FDA and other regulatory agencies can delay, limit or deny approval for many reasons, including:
 
 
·
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;
 
 
·
a product candidate may not be deemed to be safe or effective;
 
 
·
the ability of the regulatory agency to provide timely responses as a result of its resource constraints;
 
 
·
the manufacturing processes or facilities may not meet the applicable requirements; and
 
 
·
changes in their approval policies or adoption of new regulations may require additional clinical trials or other data.
 
Any delay in, or failure to receive, approval for any of our product candidates or the failure to maintain regulatory approval could prevent us from growing our revenues or achieving profitability.
 
Our potential international business would expose us to a number of risks.
 
We anticipate that a substantial amount of future sales of our potential products will be derived from international markets. Accordingly, any failure to achieve substantial foreign sales could have a material adverse effect on our overall sales and profitability. Depreciation or devaluation of the local currencies of countries where we sell our products may result in these products becoming more expensive in local currency terms, thus reducing demand, which could have an adverse effect on our operating results. Our ability to engage in non-United States operations and the financial results associated with any such operations also may be significantly affected by other factors, including:
 
 
·
foreign government regulatory authorities;
 
 
·
product liability, intellectual property and other claims;
 
 
·
export license requirements;
  
 
·
political or economic instability in our target markets;
 
 
·
trade restrictions;
 
   
·
changes in tax laws and tariffs;
 
 
·
managing foreign distributors and manufacturers;
 
 
·
managing foreign branch offices and staffing; and
 
 
·
competition.
 
 
 
 
16
 
 
 
 
If these risks actually materialize, our anticipated sales to international customers may decrease or not be realized at all.
 
Competition in our target markets is intense, and developments by other companies could render our product candidates obsolete.
 
The pharmaceutical industry is not a static environment, and market share can change rapidly if competing products are introduced. While we believe we are in the process of developing products unique in the delivery and application for treatment of urological maladies, we face competition from Ortho-McNeil, Inc., BioNiche, Inc., Plethora Solutions Ltd., and SJ Pharmaceuticals, Inc., among others, who have either already developed or are in the process of developing products similar to ours. Further, there can be no assurance that we can avoid intense competition from other medical technology companies, pharmaceutical or biotechnology companies, universities, government agencies, or research organizations that might decide to develop products similar to ours. Many of these existing and potential competitors have substantially greater financial and/or other resources. Our competitors may succeed in developing technologies and products that are more effective or cheaper to use than any that we may develop. These developments could render our products obsolete and uncompetitive, which would have a material adverse effect on our business, financial condition and results of operations.
 
If we suffer negative publicity concerning the safety of our products in development, our sales may be harmed and we may be forced to withdraw such products.
 
If concerns should arise about the safety of our products once developed and marketed, regardless of whether or not such concerns have a basis in generally accepted science or peer-reviewed scientific research, such concerns could adversely affect the market for these products. Similarly, negative publicity could result in an increased number of product liability claims, whether or not these claims are supported by applicable law.
 
Adverse events in the field of drug therapies may negatively impact regulatory approval or public perception of our potential products and technologies.
 
The FDA may become more restrictive regarding the conduct of clinical trials including urological and other therapies. This approach by the FDA could lead to delays in the timelines for regulatory review, as well as potential delays in the conduct of clinical trials. In addition, negative publicity may affect patients’ willingness to participate in clinical trials. If fewer patients are willing to participate in clinical trials, the timelines for recruiting patients and conducting such trials will be delayed.
 
If our intellectual property rights do not adequately protect our products, others could compete against us more directly, which would hurt our profitability.
 
Our success depends in part on our ability to obtain patents or rights to patents, protect trade secrets, operate without infringing upon the proprietary rights of others, and prevent others from infringing on our patents, trademarks and other intellectual property rights. We will be able to protect our intellectual property from unauthorized use by third parties only to the extent that it is covered by valid and enforceable patents, trademarks or licenses. Patent protection generally involves complex legal and factual questions and, therefore, enforceability of patent rights cannot be predicted with certainty; thus, any patents that we own or license from others may not provide us with adequate protection against competitors. Moreover, the laws of certain foreign countries do not recognize intellectual property rights or protect them to the same extent as do the laws of the United States.
 
In addition to patents and trademarks, we rely on trade secrets and proprietary know-how. We seek protection of these rights, in part, through confidentiality and proprietary information agreements. These agreements may not provide sufficient protection or adequate remedies for violation of our rights in the event of unauthorized use or disclosure of confidential and proprietary information. Failure to protect our proprietary rights could seriously impair our competitive position.
 
If third parties claim we are infringing their intellectual property rights, we could suffer significant litigation or licensing expenses or be prevented from marketing our products.
 
Any future commercial success by the Company depends significantly on our ability to operate without infringing on the patents and other proprietary rights of others. However, regardless of the Company’s intent, our potential products may infringe upon the patents or violate other proprietary rights of third parties. In the event of such infringement or violation, we may face expensive litigation, may be obliged to enter into expensive licensing agreements, or may be prevented from pursuing product development or commercialization of our potential products or selling our products.
 
Litigation may harm our business or otherwise distract our management.
 
Substantial, complex or extended litigation could cause us to incur large expenditures and distract our management, and could result in significant monetary or equitable judgments against us. For example, lawsuits by employees, patients, customers, licensors, licensees, suppliers, distributors, stockholders, or competitors could be very costly and substantially disrupt our business. Disputes from time to time with such companies or individuals are not uncommon, and we cannot assure that we will always be able to resolve such disputes out of court or on terms favorable to us.
 
 
 
17
 
 
 
In previous years, there has been significant litigation in the United States involving patents and other intellectual property rights. Competitors in the biotechnology industry may use intellectual property litigation against us to gain advantage. In the future, we may be a party to litigation to protect our intellectual property or as a result of an alleged infringement of others’ intellectual property. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. Any potential intellectual property litigation, if successful, also could force us to stop selling, incorporating or using our potential products that use the challenged intellectual property; obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or redesign our potential products that use the technology. We may also be required in the future to initiate claims or litigation against third parties for infringement of our intellectual property rights to protect such rights or determine the scope or validity of our intellectual property or the rights of our competitors. The pursuit of these claims could result in significant expenditures and the diversion of our technical and management personnel and we may not have sufficient cash and manpower resources to pursue any such claims. If we are forced to take any of these actions, our business may be seriously harmed.

Any claims, with or without merit, and regardless of whether we prevail in the dispute, would be time-consuming, could result in costly litigation and the diversion of technical and management personnel and could require us to develop non-infringing technology or to enter into royalty or licensing agreements. An adverse determination in a judicial or administrative proceeding and failure to obtain necessary licenses or develop alternate technologies could prevent us from developing and selling our potential products, which would have a material adverse effect on our business, results of operations and financial condition.
 
If we fail to attract and keep key management and scientific personnel, we may be unable to develop or commercialize our product candidates successfully.
 
Our success depends on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. The loss of the services of any principal member of our senior management, including William J. Garner, M.D., Chief Executive Officer and Martin E. Shmagin, Chief Financial Officer, could delay or prevent the commercialization of our product candidates. We employ these individuals on an at-will basis and their employment can be terminated by us or them at any time, for any reason and with or without notice, subject to the terms contained in their employment agreements.
 
Competition for qualified personnel in the biotechnology field is intense. We may not be able to attract and retain quality personnel on acceptable terms given the competition for such personnel among biotechnology, pharmaceutical and other companies.
 
We have established a scientific advisory board consisting of C. Lowell Parsons, M.D. who is a Professor of the Department of Urology at the University of California, San Diego, S. Grant Mulholland, M.D. who is Chair Emeritus of Urology at Jefferson Medical College of Thomas Jefferson University and Christian Stief, M.D. who is Professor and Chairman of the Department of Urology at Ludwig Maximilians University in Munich, Germany.  These members assist us in formulating research and development strategies. These scientific advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. The failure of our scientific advisors to devote sufficient time and resources to our programs could harm our business. In addition, our scientific advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with our products.
 
If the results of future pre-clinical studies, clinical testing and/or clinical trials indicate that our proposed products are not safe or effective for human use, our business will suffer.

        Unfavorable results from future clinical testing and/or clinical trials could result in delays, modifications or abandonment of future clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in late stage clinical trials, even after promising results in initial-stage trials. Clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be delayed, repeated, modified or terminated. In addition, failure to design appropriate clinical trial protocols could result in the test or control group experiencing a disproportionate number of adverse events and could cause a clinical trial to be delayed, repeated, modified or terminated.

        The investigational product candidates that we are currently developing may require extensive pre-clinical and/or clinical testing before we can submit any application for regulatory approval. Before obtaining regulatory approvals for the commercial sale of any of our investigational product candidates, we must demonstrate through pre-clinical testing and/or clinical trials that our investigational product candidates are safe and effective in humans. Conducting clinical trials is a lengthy, expensive and uncertain process. Completion of clinical trials may take several years or more. Our ability to complete clinical trials may be delayed by many factors, including, but not limited to:
 
  
●      inability to manufacture sufficient quantities of compounds for use in clinical trials;
 
  
●      failure to receive approval by the FDA of our clinical trial protocols;
 
  
●      changes in clinical trial protocols made by us or imposed by the FDA;
 
 
 
18
 
 
 
  
●      the effectiveness of our investigational product candidates;
 
  
●      slower than expected rate of and higher than expected cost of patient recruitment;
 
  
●      inability to adequately follow patients after treatment;
 
  
●      unforeseen safety issues;
 
  
●     government or regulatory delays; or
 
  
●     our ability to raise the necessary funds to start or complete the trials.
 
 
        These factors may also ultimately lead to denial of regulatory approval of a current or investigational drug candidate. If we experience delays, suspensions or terminations in our clinical trials for a particular investigational product candidate, the commercial prospects for that investigational candidate will be harmed, and we may be unable to raise additional funds, generate product revenues, or revenues from that investigational candidate could be delayed.

        Commercial supplies of one of the active ingredients in URG101, heparin, were recalled by the manufacturer as the supply was compromised due to non-cGMP practices that resulted in such supplies failing to meet FDA approved product specifications.  While the FDA has tightened the manufacturing process of heparin by requiring the use of more sensitive assays to ensure compliance with approved product specifications, such changes in and of themselves cannot guarantee uninterrupted commercial supplies in the future.

We may not achieve projected development goals in the time frame we announce and expect.
 
We may set goals for and make public statements regarding timing of the accomplishment of objectives material to our success, such as the commencement and completion of clinical trials, anticipated regulatory approval dates, and time of product launch. The actual timing of these events can vary dramatically due to factors such as delays or failures in its clinical trials, the uncertainties inherent in the regulatory approval process, and delays in achieving product development, manufacturing or marketing milestones necessary to commercialize the combined company’s products. There can be no assurance that our clinical trials will be completed, that we will make regulatory submissions or receive regulatory approvals as planned, or that the combined company will be able to adhere to its current schedule for the scale-up of manufacturing and launch of any of our products. If we fail to achieve one or more of these milestones as planned, the price of our common shares could decline.
  
We will need to obtain additional financing in order to continue our operations, which financing might not be available or which, if it is available, may be on terms that are not favorable to us.
 
Our ability to engage in future development and clinical testing of our potential products will require substantial additional financial resources. We currently use approximately $35,000 per month to operate our business. Our future funding requirements will depend on many factors, including:
 
 
●
Our financial condition;
 
 
●
timing and outcome of the Phase II clinical trials for URG101;
 
 
●
developments related to our collaboration agreements, license agreements, academic licenses and other material agreements;
 
 
●
our ability to establish and maintain corporate collaborations;
 
 
●
the time and costs involved in filing, prosecuting and enforcing patent claims; and
 
 
●
competing pharmacological and market developments.
 
We may have insufficient working capital to fund our cash needs unless we are able to raise additional capital in the future. We have financed our operations to date primarily through the sale of equity securities and through corporate collaborations. If we raise additional funds by issuing equity securities, substantial dilution to our stockholders may result. We may not be able to obtain additional financing on acceptable terms, or at all. Any failure to obtain an adequate and timely amount of additional capital on commercially reasonable terms will have a material adverse effect on our business and financial condition, including our viability as an enterprise. As a result of these concerns, our management is assessing, and may pursue other strategic opportunities, including the sale of our securities or other actions. 
 
 
 
 
19
 

 
We may continue to incur losses for the foreseeable future, and might never achieve profitability.
 
We may never become profitable, even if we are able to commercialize additional products. We will need to conduct significant research, development, testing and regulatory compliance activities that, together with projected general and administrative expenses, is expected to result in substantial increase in operating losses for at least the next several years. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
 
Our stock price is expected to be volatile, and the market price of our common stock may fluctuate.
 
The market price of our common stock is subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:
 
 
●
the results of our current and any future clinical trials of our product candidates;
 
 
●
the entry into, or termination of, key agreements, including, among others, key collaboration and license agreements;
 
 
●
the results and timing of regulatory reviews relating to the approval of our product candidates;
 
 
●
the initiation of, material developments or conclusion of litigation to enforce or defend any of our intellectual property rights;
 
 
●
failure of any of our product candidates, if approved, to achieve commercial success;
 
 
●
general and industry-specific economic conditions that may affect our research and development expenditures;
 
 
●
the results of clinical trials conducted by others on drugs that would compete with our product candidates;
 
 
●
issues in manufacturing our product candidates or any approved products;
 
 
●
the loss of key employees;
 
 
●
the introduction of technological innovations or new commercial products by our competitors;
 
 
●
changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
 
 
●
future sales of our common stock; and
 
 
●
period-to-period fluctuations in our financial results.
 
Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our financial position, results of operations and reputation.
 
Our common stock is quoted on the OTC Bulletin Board. As a result, our common stock is subject to trading restrictions as a “penny stock,” which could adversely affect the liquidity and price of such stock.
 
Our common stock has been quoted on the OTC Bulletin Board since June 19, 2007. Because our common stock is not listed on any national securities exchange, our shares are subject to the regulations regarding trading in “penny stocks,” which are those securities trading for less than $5.00 per share. The following is a list of the general restrictions on the sale of penny stocks:
 
 
●
Prior to the sale of penny stock by a broker-dealer to a new purchaser, the broker-dealer must determine whether the purchaser is suitable to invest in penny stocks. To make that determination, a broker-dealer must obtain, from a prospective investor, information regarding the purchaser's financial condition and investment experience and objectives. Subsequently, the broker-dealer must deliver to the purchaser a written statement setting forth the basis of the suitability finding and obtain the purchaser’s signature on such statement.
 
 
●
A broker-dealer must obtain from the purchaser an agreement to purchase the securities. This agreement must be obtained for every purchase until the purchaser becomes an “established customer.” A broker-dealer may not effect a purchase of a penny stock less than two business days after a broker-dealer sends such agreement to the purchaser.
 
 
 
20
 
 
 
 
●
The Exchange Act requires that prior to effecting any transaction in any penny stock, a broker-dealer must provide the purchaser with a “risk disclosure document” that contains, among other things, a description of the penny stock market and how it functions and the risks associated with such investment. These disclosure rules are applicable to both purchases and sales by investors.
 
 
●
A dealer that sells penny stock must send to the purchaser, within ten days after the end of each calendar month, a written account statement including prescribed information relating to the security.
 
These requirements can severely limit the liquidity of securities in the secondary market because few brokers or dealers are likely to be willing to undertake these compliance activities. Because our common stock is subject to the rules and restrictions regarding penny stock transactions, an investor’s ability to sell to a third party and our ability to raise additional capital may be limited. We make no guarantee that our market-makers will make a market in our common stock, or that any market for our common stock will continue.
 
Our stock price could be adversely affected by dispositions of our shares pursuant to registration statements currently in effect.
 
Some of our current stockholders hold a substantial number of shares, which they are currently able to sell in the public market under certain registration statements currently in effect, or otherwise. Sales of a substantial number of our shares or the perception that these sales may occur, could cause the trading price of our common stock to fall and could impair our ability to raise capital through the sale of additional equity securities.
 
As of June 30, 2009, we had issued and outstanding 73,494,327 shares of our common stock. This amount does not include, as of June 30, 2009:

·
approximately 0.7 million shares of unregistered, subscribed common stock currently issuable;

·
approximately 1.3 million shares of our common stock issuable upon the exercise of all of our outstanding options;

·
approximately 17.0 million shares of our common stock issuable upon the exercise of all of our outstanding warrants;
.
·
210 shares of Series B preferred stock that currently is convertible into 21.0 million shares of common stock.
 
These shares of common stock, if and when issued, may be sold in the public market assuming the applicable registration statements continue to remain effective and subject in any case to trading restrictions to which our insiders holding such shares may be subject to from time to time. If these options or warrants are exercised and sold, our stockholders may experience additional dilution and the market price of our common stock could fall.
 
Our amended and restated certificate of incorporation and by-laws, include anti-takeover provisions that may enable our management to resist an unwelcome takeover attempt by a third party.
 
Our basic corporate documents and Delaware law contain provisions that enable our management to attempt to resist a takeover unless it is deemed by our management and board of directors to be in the best interests of our stockholders. Those provisions might discourage, delay or prevent a change in control of our company or a change in our management. Our board of directors may also choose to adopt further anti-takeover measures without stockholder approval. The existence and adoption of these provisions could adversely affect the voting power of holders of our common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.
 
We may not be able to meet the initial listing standards to trade on a national securities exchange such as the Nasdaq Capital Market or the American Stock Exchange, which could adversely affect the liquidity and price of the Company’s common stock.
 
The initial listing qualification standards for new issuers are stringent and, although we may explore various actions to meet the minimum initial listing requirements for a listing on a national securities exchange, there is no guarantee that any such actions will be successful in bringing us into compliance with such requirements.

If we fail to achieve listing of our common stock on a national securities exchange, our common shares may continue to be traded on the OTC Bulletin Board or other over-the-counter markets in the United States, although there can be no assurance that our common shares will be eligible for trading on any such alternative markets or exchanges in the United States.
 
In the event that we are not able to obtain a listing on a national securities exchange or maintain our reporting on the OTC Bulletin Board or other quotation service for our common shares, it may be extremely difficult or impossible for stockholders to sell their common shares in the United States. Moreover, if our common stock remains quoted on the OTC Bulletin Board or other over-the-counter market, the liquidity will likely be less, and therefore the price will be more volatile, than if our common stock was listed on a national securities exchange. Stockholders may not be able to sell their common shares in the quantities, at the times, or at the prices that could potentially be available on a more liquid trading market. As a result of these factors, if our common shares fail to achieve listing on a national securities exchange, the price of our common shares may decline. In addition, a decline in the price of our common shares could impair our ability to achieve a national securities exchange listing or to obtain financing in the future.
 
 
 
21
 
 
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.
 
ITEM 2.
PROPERTIES

We pay a fee of $1,083 per month, which is based on estimated fair market value, to EGB Advisors, LLC for rent and other office services at our headquarters in San Francisco, California. EGB Advisors, LLC is owned solely by William J. Garner, president and Chief Executive Officer of Urigen Pharmaceuticals, Inc.
 
ITEM 3.
LEGAL PROCEEDINGS
 
None.
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.

 
22
 

 

PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
Our common stock is quoted on the OTC Bulletin Board under the symbol “URGP.OB.” Previously, commencing June 19, 2007 our common stock was quoted on the OTC Bulletin Board under the symbol VLTS.OB. The following table sets forth, for the calendar periods indicated, the high and low per share sales prices for our common stock as reported by the OTC Bulletin Board since after the Merger.


   
High
    
Low
  
2009
                
First Quarter
  
$
0.11
    
$
0.06
  
Second Quarter
    
0.15
      
0.02
  
Third Quarter
    
0.19
      
0.02
  
Fourth Quarter  
    
0.10
      
0.06
  

 
   
High
    
Low
  
2008
                
First Quarter
  
$
0.50
    
$
0.10
  
Second Quarter
    
0.22
      
0.08
  
Third Quarter
    
0.19
      
0.09
  
Fourth Quarter  
    
0.17
      
0.07
  
 
 
On September 22, 2009 the last sale price reported on the OTC Bulletin Board for our common stock was $0.065 per share. As of September 22, 2009, the Company was aware of 347 stockholders of record of our common stock. We believe that the number of beneficial owners is substantially greater than the number of record holders because a large portion of our common stock is held of record through brokerage firms in “street name.”
  
Sales and Repurchases of Securities

In February 2009, the Company negotiated a vendor agreement providing 200,000 shares of unregistered subscribed common stock to a vendor in exchange for services provided by the vendor to the Company, at a fair value of approximately $28,000.

In March 2009, the Company negotiated vendor agreements providing 325,000 shares of unregistered subscribed common stock to two vendors in exchange for services provided by the vendors to the Company, at a fair value of approximately $32,500.

In April 2009, the Company negotiated a vendor agreement providing 15,000 shares of unregistered subscribed common stock to a vendor in exchange for services provided by the vendor to the Company, at a fair value of approximately $1,350.
 
All of the above offerings and sales were deemed to be exempt under Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of the Company or executive officers of the Company, and transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.
 
Dividends
 
The Company has never paid any cash dividends on common stock.  During the years ended June 30, 2009 and 2008 the Company recorded $87,228 and $55,633 respectively of accrued imputed dividends on Series B preferred stock classified as equity.
 
 
23
 

ITEM 6.
SELECTED FINANCIAL DATA
 
The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this report.
 
 
Year ended June 30,
    
Cumulative
period from
18-Jul-05
(inception to date) to
 
2009
  
2008
     30-Jun-09  
 
(in thousands, except for per share data)
  
(in thousands)
  
Consolidated Statement of Operations Data:
                    
Operating expenses:
                    
    Research and development
$
195
  
$
684
    
$
2,441
  
    General and administrative
  
1,533
    
2,762
      
7,109
  
    Sales and marketing
  
77
    
264
      
648
  
    Total operating expenses
  
1,805
    
3,710
      
10,198
  
    Loss from operations
  
(1,805
)
  
(3,710
)
    
(10,198
)
Interest, other income and expense, net
  
(452
)
  
(1,134
)
    
(1,694
)
Net loss
$
(2,257
)
$
(4,844
)
  
$
(11,894
)
Net loss attributable to common shareholders  $   (2,532 ) $    (4,844 )    $   (12,169 ) 
Basic and diluted net loss per share
$
(0.03
)
$
(0.07
)
        
                     
Shares used in computing basic and diluted net loss per common share
  
72,469
    
69,860
          
                     
 
                 
   
As of June 30,
  
   
2009
    
2008
  
   
(in thousands)
          
Consolidated Balance Sheet Data:
                
    Cash
  
$
3
    
$
46
  
    Working capital
    
(5,081
)
    
(2,709
)
    Total assets
    
359
      
464
  
    Deficit accumulated during development stage
    
(11,894
)
    
(9,637
)
    Total stockholders' deficit
    
(4,758
)
    
(2,337
)


 
24
 

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements containing the words “believes,” “anticipates,” “expects,” “intends,” “projects,” “will,” and other words of similar import or the negative of those terms or expressions. Forward-looking statements in this report include, but are not limited to, expectations of future levels of research and development spending, general and administrative spending, levels of capital expenditures and operating results, sufficiency of our capital resources, our intention to pursue and consummate strategic opportunities available to us, including sales of certain of our assets. Forward-looking statements subject to certain known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to, those described in Part I, “Item 1A. Risk Factors” of 10-K reports filed with the Securities and Exchange Commission and those described from time to time in our future reports filed with the Securities and Exchange Commission.
 
CORPORATE OVERVIEW

We were formerly known as Valentis, Inc. and were formed as the result of the merger of Megabios Corp. and GeneMedicine, Inc. in March 1999. We were incorporated in Delaware on August 12, 1997. In August 1999, we acquired U.K.-based PolyMASC Pharmaceuticals plc.

On October 5, 2006, we entered into an Agreement and Plan of Merger, as subsequently amended (the “Merger”) with Urigen N.A., Inc., a Delaware corporation (“Urigen N.A.”), and Valentis Holdings, Inc., our newly formed wholly-owned subsidiary (“Valentis Holdings”). Pursuant to the Merger Agreement, on July 13, 2007, Valentis Holdings was merged with and into Urigen N.A., with Urigen N.A. surviving as our wholly-owned subsidiary. In connection with the Merger, each Urigen stockholder received, in exchange for each share of Urigen N.A. common stock held by such stockholder immediately prior to the closing of the Merger, 2.2554 shares of our common stock. At the effective time of the Merger, each share of Urigen N.A. Series B preferred stock was exchanged for 11.277 shares of our common stock. An aggregate of 51,226,679 shares of our common stock were issued to the Urigen N.A. stockholders. Upon completion of the Merger, we changed our name from Valentis, Inc. to Urigen Pharmaceuticals, Inc.

From and after the Merger, our business is conducted through our wholly owned subsidiary Urigen N.A. The discussion of our business in this annual report is that of our current business which is conducted through Urigen N.A.   

BUSINESS
 
We specialize in the design and implementation of innovative products for patients with urological ailments including, specifically, the development of innovative products for amelioration of Painful Bladder Syndrome (PBS), Urethritis, Nocturia and Overactive Bladder (OAB).
 
Urology represents a specialty pharmaceutical market of approximately 12,000 physicians in North America. Urologists treat a variety of ailments of the urinary tract including urinary tract infections, bladder cancer, overactive bladder, urgency and incontinence and interstitial cystitis, a subset of PBS. Many of these indications represent significant, underserved therapeutic market opportunities.
 
Over the next several years a number of key demographic and technological factors should accelerate growth in the market for medical therapies to treat urological disorders, particularly in our product categories. These factors include the following:
 
· 
Aging population. The incidence of urological disorders increases with age. The over-40 age group in the United States is growing almost twice as fast as the overall population. Accordingly, the number of individuals developing urological disorders is expected to increase significantly as the population ages and as life expectancy continues to rise.
 
 · 
 
Increased consumer awareness. In recent years, the publicity associated with new technological advances and new drug therapies has increased the number of patients visiting their urologists to seek treatment for urological disorders.
 
 Urigen’s two clinical stage products target significant unmet medical needs with meaningful market opportunities in urology:
 
· 
URG101, a bladder instillation for Painful Bladder Syndrome/Interstitial Cystitis
 · 
URG301, a female urethral suppository for urethritis and nocturia
 
URG101 targets Painful Bladder Syndrome/Interstitial Cystitis (PBS) which affects approximately 10.5 million men and women in North America.  URG101 is a unique, proprietary combination therapy of components that is locally delivered to the bladder for rapid relief of pain and urgency as demonstrated in Urigen’s positive Phase II Pharmacodynamic Crossover study.
 
 
 
25
 
 

 
URG301 targets urethritis and nocturia, typically seen in overactive bladder patients. URG301 is a proprietary dosage form of an approved drug that is locally delivered to the female urethra. Urethritis pain commonly occurs with urinary tract infections (UTIs) which cause more than 8 million visits to the doctor annually. Nocturia, or nighttime urgency and frequency, is secondary to overactive bladder and can severely impact quality of life by disrupting the normal sleep pattern.

The novel urethral suppository platform presents excellent opportunities for effective product lifecycle management.  As market penetration of URG301 deepens, line extensions will be available through alternate generic drugs as well as new chemical entities.  To further expand the pipeline, the Company will identify and prioritize both marketed and development-stage products for acquisition.  The commercial opportunity for such candidates will benefit significantly from the synergy provided by URG101 and URG301 in the urology marketplace.
 
We plan to market our products to urologists and urogynecologists in the United States via a specialty sales force managed internally. As appropriate, our specialty sales force will be augmented by co-promotion and licensing agreements with pharmaceutical companies that have the infrastructure to market our products to general practitioners. In all other countries, we plan to license marketing and distribution rights to our products to pharmaceutical companies with strategic interests in urology and gynecology.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, except for the impact of FASB Staff Position (“FSP”) 157-2. FSP 157-2 deferred the adoption of SFAS 157 for non financial assets and liabilities until years beginning after November 15, 2008. The Company adopted SFAS 157 effective July 1, 2008 and it did not have a material effect on our financial position and/or results of operations.
 
In February 2007, the FASB issued SFAS 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 their statement of operations at each subsequent reporting date on items for which the 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 results of operations. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company adopted SFAS 159 effective July 1, 2008.  The Company did not make any elections for fair value accounting and therefore, it did not record a cumulative-effect adjustment to its opening accumulated deficit balance.
 
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R changes accounting for acquisitions made by the Company with closing dates on or after July 1, 2009.  More transactions and events will qualify as business combinations and will be accounted for at fair value under the new standard.  SFAS 141R promotes greater use of fair values in financial reporting.  Some of the changes will introduce more volatility into earnings.  SFAS 141R is effective for fiscal years beginning on or after December 15, 2008.  SFAS 141R will have an impact on the Company’s financial position, results of operations, and cash flows, but the effect is dependant upon the acquisitions that may be made in the future.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), an amendment of ARB No. 51. SFAS 160 will change the accounting and reporting for minority interests which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of presentation and disclosure requirements for existing minority interests. The Company is currently assessing the impact that SFAS 160 may have on its financial position, results of operations, and cash flows.
 
In December 2007, the FASB issued Emerging Issues Task Force (“EITF”) Issue 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”). Collaborative arrangements are agreements between parties to participate in some type of joint operating activity. The task force provided indicators to help identify collaborative arrangements and provides for reporting of such arrangements on a gross or net basis pursuant to guidance in existing authoritative literature. The task force also expanded disclosure requirements about collaborative arrangements. This issue is effective for financial statements issued for fiscal years beginning after December 15, 2008 and is to be applied retrospectively for all collaborative arrangements existing as of the effective date. The Company is currently assessing the impact that EIFT 07-1 may have on its financial position, results of operations, and cash flows.
 
 
 
 
26
 

 
In July 2008, FASB issued EITF 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock". This issue was added to the EITF's agenda with the purpose of providing an overall framework for determining whether an instrument is indexed to an entity's own stock and whether such instruments or embedded features are classified as equity or a liability.  This issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently assessing the impact that EITF 07-5 may have on its financial position, results of operations, and cash flows.

In October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective immediately, including prior periods for which financial statements have not been issued. Therefore, the Company adopted the provisions of FSP 157-3 in its financial statements in the quarter ended September 30, 2008. The adoption did not have an impact on the Company's financial position, results of operations, and cash flows.
 
In April 2009, the FASB issued FASB Staff Position FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 supersedes FSP 157-3 and provides significant guidance for determining when a market has become inactive as well as guidance for determining whether transactions are not orderly. FSP 157-4 also provides guidance on the use of valuation techniques and the use of broker quotes and pricing services. It reiterates that fair value is based on an exit price and also that fair value is market-driven and not entity-specific. FSP 157- 4 applies to all assets and liabilities within the scope of FAS 157. In addition, FSP 157-4 amends SFAS 157 to require interim disclosures of the inputs and valuation technique(s) used to measure fair value as well as disclosure of information regarding changes in valuation techniques and related inputs, if any, on an interim basis. FSP 157-4 is effective for all interim and annual periods ending after June 15, 2009. The Company adopted the provisions of FSP 157-4 in the quarter ended June 30, 2009.  The adoption did not have an impact on the Company’s financial position, results of operations, and cash flows.

In April 2009, the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2”). FSP 115-2 provides guidance related to determining the amount of an other-than-temporary impairment (“OTTI”) of debt securities and prescribes the method to be used to present information about an OTTI in the financial statements. In addition, FSP 115-2 extends the disclosure requirements of SFAS 115 and FSP 115-1, which were previously generally only required for annual periods, to interim periods. FSP 115-2 is effective for all interim and annual periods ending after June 15, 2009. The Company adopted the provisions of FSP 115-2 in the quarter ended June 30, 2009.  The adoption did not have an impact on the Company’s financial position, results of operations, and cash flows.

 
In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments”   (“FSP 107-1”). FSP 107-1 amends SFAS 107, “Disclosures about Fair Value of Financial Instruments,” to require its disclosures in the interim financial statements of publicly traded companies. FAS 107 requires disclosures of the fair value of all financial instruments (recognized or unrecognized) except for those specifically excepted by paragraph 8 of SFAS 107, when practicable to do so. An entity must also disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. FSP 107-1 is effective for all interim and annual periods ending after June 15, 2009. The Company adopted the provisions of FSP 107-1 in the quarter ended June 30, 2009. Because FSP 107-1 requires only additional disclosures, the adoption of FSP 107-1 did not have an impact on the Company’s financial position, results of operations, and cash flows.

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"), which is effective for interim and annual periods ending after June 15, 2009. SFAS· 165 provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. The Company adopted the provisions of SFAS 165 in the fourth quarter of fiscal 2009 and it did not have a material impact on its consolidated financial position, results of' operations or cash flows. Refer to Note 17 for disclosure on subsequent events.

In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162" ("SFAS 168"), which approved the FASB Accounting Standards Codification ("Codification") as the single source of authoritative United States accounting and reporting standards for all non-governmental entities, except for guidance issued by the Securities and Exchange Commission. The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. Therefore, beginning with the Company's first quarter of fiscal 2010, all references made to generally accepted accounting principles in the United States ("U.S. GAAP") will use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to change or alter existing U.S. GAAP, it is not expected to have any impact on the Company’s consolidated financial position, results of operations or cash flows.


 
27
 

  

Critical Accounting Policies
 
Clinical trial expenses
 
We believe the accrual for clinical trial expenses are a significant estimate used in the preparation of our consolidated financial statements. Our accruals for clinical trial expenses are based in part on estimates of services received and efforts expended pursuant to agreements established with clinical research organizations and clinical trial sites. We have a history of contracting with third parties that perform various clinical trial activities on our behalf in the ongoing development of our biopharmaceutical drugs. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flows. We determine our estimates through discussion with internal clinical personnel and outside service providers as to progress or stage of completion of trials or services and the agreed upon fee to be paid for such services. The objective of our clinical trial accrual policy is to reflect the appropriate trial expenses in our financial statements by matching period expenses with period services and efforts expended. In the event of early termination of a clinical trial, we accrue expenses associated with an estimate of the remaining, non-cancelable obligations associated with the winding down of the trial. Our estimates and assumptions for clinical trial expenses have been materially accurate in the past.
 
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.
 
Contractual Obligations and Notes Payable
 
In November 2007, the Company entered into an agreement with M & P Patent AG (Mattern) under which we licensed worldwide rights to Mattern’s intra-nasal testosterone product for men.  The Mattern patent and intellectual property rights were not placed in service and were not being amortized, nor included in future amortization estimates, as of December 31, 2007. At December 31 2007, the Company had recorded a license payment to Mattern of one million shares of Urigen common stock and accrued $1,500,000 in milestone payments.  The Company terminated its license agreement with Mattern effective March 31, 2008.  Accordingly, the accrued liability and intangible asset was reversed and a general and administrative impairment expense of $99,750 was recorded, which represents the fair value of the one million shares of restricted stock that were issued.  The Company believes there will be no further payments to Mattern as a result of this transaction.
 
On November 17, 2006, the Company entered into an unsecured promissory note with 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”).  All amounts due under the note agreement are still outstanding as of June 30, 2009.  Also, the Company had issued 11,277 shares of Urigen N.A. Series B preferred stock, in connection with this note agreement, which was converted to common stock at the time of the Merger.  Interest expense paid was $0 and $8,000 for the years ended June 30, 2009 and 2008, respectively.  At June 30, 2009 and 2008, the Company owed accrued interest expense of $42,000 and $18,000, respectively.

On January 5, 2007, the Company entered into an unsecured promissory note with KTEC Holdings, Inc. in the amount of $100,000. Tracy Taylor who was the Company’s Chairman of the Board of Directors at the time this note was signed, is President and Chief Executive Officer of the Kansas Technology Enterprise Corporation (KTEC).  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 are due and payable by the Company 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 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 had issued 5,639 shares of Urigen N.A. Series B preferred stock in connection with this note agreement, which was converted to common stock at the time of the Merger.  If this note is not paid when due, interest shall accrue thereafter at the rate of 18% per annum. All principal amounts due under the note agreement are still outstanding as of June 30, 2009. Interest paid was $0 and $4,088 for the years ended June 30, 2009 and 2008, respectively.  At June 30, 2009 and 2008, the Company owed accrued interest expense of $23,236 and $9,536, respectively.

On June 25, 2007, Valentis, Inc., upon approval of its Board of Directors, issued Benjamin F. McGraw, III, Pharm.D., who was the Company’s Chief Executive Officer, President and Treasurer prior to the Merger, a promissory note in the amount of $176,000 in lieu of accrued bonus compensation owed to Dr. McGraw. This note was assumed by the Company pursuant to the Merger. The note bears interest at the rate of 5.0% per annum, may be prepaid by the Company in full or in part at anytime without premium or penalty and was due and payable in full on December 25, 2007.  On December 25, 2007, the note was extended through June 25, 2008.  On August 11, 2008, the note was extended through December 25, 2008.  On January 6, 2009, the note was extended through December 25, 2009.  Dr. McGraw was a member of the Board of Directors as of June 30, 2009 and resigned from the Board of Directors in July 2009.  At June 30, 2009 and June 30, 2008, the Company owed accrued interest expense of $17,600 and $8,800, respectively.
 
 
 
28
 
 
 
On August 6, 2008, the Company entered into an unsecured promissory note with C. Lowell Parsons, M.D. a director of the Company, in the amount of $40,000. 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 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The note is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  Dr. Parsons may, in his discretion, request payment of this note, in whole or in part in restricted common stock of the Company.  The rate of repayment in common stock is based on $0.15 per share.  All principal amounts due under the note agreement are still outstanding as of June 30, 2009. At June 30, 2009, the Company owed accrued interest expense of $5,417.

On August 6, 2008, the Company entered into an unsecured promissory note with J. Kellogg Parsons, M.D. the son of C. Lowell Parsons, M.D., a director of the Company, in the amount of $20,000. 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 15% simple interest.  The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The foregoing amount is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  Dr. Parsons may, in his discretion, request payment of this note, in whole or in part in restricted common stock of the Company.  The rate of repayment in common stock is based on $0.15 per share.  At June 30, 2009, the Company owed accrued interest expense of $2,708.
 
On August 12, 2008, the Company entered into an unsecured promissory note with William J. Garner, M.D., the Chief Executive Officer and a director of the Company, in the amount of $5,000. 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 15% simple interest.  The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The foregoing amount is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  At June 30, 2009, the Company owed accrued interest expense of $665.

On September 19, 2008, the Company entered into an unsecured promissory note with William J. Garner, M.D., the Chief Executive Officer and a director of the Company, in the amount of $20,000. 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 15% simple interest.  The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The foregoing amount is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  At June 30, 2009, the Company owed accrued interest expense of $2,342.
 
On September 22, 2008, the Company entered into an unsecured promissory note with C. Lowell Parsons, M.D. a director of the Company, in the amount of $30,000. 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 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The note is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  Dr. Parsons may, in his discretion, request payment of this note, in whole or in part in restricted common stock of the Company.  The rate of repayment in common stock is based on $0.15 per share.  At June 30, 2009 the Company owed accrued interest expense of $3,475.

On September 25, 2008, the Company entered into an unsecured promissory note with C. Lowell Parsons, M.D. a director of the Company, in the amount of $70,000. 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 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The note is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  Dr. Parsons may, in his discretion, request payment of this note, in whole or in part in restricted common stock of the Company.  The rate of repayment in common stock is based on $0.15 per share.  At June 30, 2009, the Company owed accrued interest expense of $8,021.
 
 
 
 
29
 

 

On October 6, 2008, the Company entered into an unsecured promissory note with a third party, in the amount of $20,000. 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 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a Bridge Loan of a minimum of $300,000.  The note  is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two (2) calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  The note holder may, in their discretion, request payment of this note, in whole or in part in restricted common stock of the Company.  The rate of repayment in common stock is based on $0.15 per share. At June 30, 2009, the Company owed accrued interest expense of $2,208.

The Company entered into a note purchase agreement (the "Note" or the "Purchase Agreement") dated as of January 9, 2009 with Platinum-Montaur Life Science, LLC ("Platinum" or the "Holder") for the sale of 10% senior secured convertible promissory notes in the aggregate principal amount of $257,000. The Note matures on October 9, 2009. Interest at the rate of 10% per annum is payable quarterly commencing April 1, 2009 and on the maturity date. Interest is payable at the option of the Company, in cash or in registered shares of the Company’s stock under certain conditions. However, the Company may not issue shares toward the payment of interest in excess of 20% of the aggregate dollar trading volume of the Company’s stock over the 20 consecutive trading days immediately prior to the interest payment date.

The Note is convertible into shares of the Company’s common stock at a conversion price of $0.10 per share.

Pursuant to the terms of the Note, events of default include, but are not limited to: (i) failure to pay principal or any payments due under the Note or to timely deliver any shares of common stock upon conversion of the Note or any interest, (ii) failure to comply with any covenant or agreement contained in the Note, the Purchase Agreement or any other document executed in connection with the Purchase Agreement, (iii) suspension of listing or failure to be listed on at least the OTC Bulletin Board, the AMEX, the Nasdaq Capital Markers, the Nasdaq Global Market, the Nasdaq Global Select Market or the NYSE for a period of 5 consecutive trading days, (iv) the Company’s notice to the Holder of its inability to comply or its intention not to comply with requests for conversion of the Note into shares of the Company’s common stock, (v) failure of the Company to instruct its transfer agent to remove any legends from shares eligible to be sold under Rule 144 and issued such clean stock certificates within 3 business days of the Holder’s request, (vi) the Company shall apply for or consent to the appointment of or the taking of possession by a receive, custodian, trustee or liquidator or makes a general assignment for the benefit of its creditors or commences a voluntary case of bankruptcy, files a petition seeking protection of bankruptcy, insolvency, moratorium, reorganization or other similar law, acquiesces in the filing of a petition against it in an involuntary case under the United States Bankruptcy Code, issues a notice of bankruptcy or winding down of its operations or issues a press release regarding same.

In addition to the foregoing:

  ●
The Company granted to Platinum the right to subscribe for an additional amount of securities of the Company in any subsequent financing conducted by the Company for the period commencing on the closing date of this Note through the date the Note is repaid. In addition, if the Company enters into any subsequent financing on terms more favorable than the terms of the Note then the Holder has the option to exchange the Note together with accrued and unpaid interest for the securities to be issued in the subsequent financing.

  ●
The Company agreed not to issue any variable equity securities, as such term is defined in the Purchase Agreement, unless the Company receives the prior written approval of Platinum. Variable equity securities include, but are not limited to, (A) any debt or equity securities which are convertible into, exercisable or exchangeable for, or carry the right to receive additional shares of common stock, (B) any amortizing convertible security which amortizes prior to its maturity date, where the Company is required to or has the option to make such amortization payment in shares of common stock, or (C) any equity line transaction.

  ●
The Company granted Platinum piggy-back registration rights in connection with the shares of common stock issuable upon conversion of the Note.

  ●
The Company has agreed to reserve 120% of the number of shares into with the Note is convertible.

  ●
As security for the payment of the Note the Company and its wholly owned subsidiary, Urigen, N.A., Inc. (“Urigen N.A.”) entered into a security agreement and patent, trademark and copyright security agreement pursuant to which they pledged all of their assets. In addition, Urigen N.A. executed a guaranty guaranteeing the obligations of the Company under the Purchase Agreement.

  ●
The terms of the Note provide that it may not be converted if such exercise would result in the Holder having beneficial ownership of more than 4.99% of the Company’s outstanding common stock; provided that the Holder may waive this provision upon 61 days notice; and provided further that such ownership limitation may not exceed 9.9%.
 
 
 
30
 
 

 
  ●
In the event that the Company issues or sells any additional shares of common stock or any rights or warrants or options to purchase shares at a price that is less than the conversion price, then the conversion price shall be adjusted to the lower price at which such additional shares were issued or sold. The Company will not be required to make any adjustment to the conversion price in connection with (A) issuances of shares of common stock or options to its employees, officers or directors pursuant to any existing stock or option plan, (B) securities issued pursuant to acquisitions or strategic transactions or (C)  issuances of securities upon the exercise or exchange of or conversion of the Note and other securities exercisable or exchangeable for or convertible into shares of common stock issued and outstanding as of the date of the Purchase Agreement.

  ●
In the event of a default as described in the Note, the Holder shall have the right to require the Company to repay in cash all or a portion of the Note plus all accrued but unpaid interest at a price of 110% of the aggregate principal amount of the Note plus all accrued and unpaid interest.

The issuance of this Note resulted in a change to the conversion price per share of the Series B Convertible Preferred Stock issued pursuant to the terms of the Series B Convertible Preferred Stock Purchase Agreement dated as of July 31, 2007 (see Note 10).
 
On January 21, 2009, the Company entered into an unsecured non interest bearing convertible promissory note of $50,000 with a third party.   The note matures on December 31, 2009. Under the terms of the note, the third party will perform consulting services for the Company.  Under the terms of the note, the Company may prepay in whole or in part without premium or penalty, at any time.  At any time prior to or at the time of prepayment of this note, the holder may elect to convert some or all of the principal owing under this Note into shares of the Company’s common stock at the rate of $0.02 per share.  The holder’s right to convert the obligations due under this note to common stock shall supersede the Company’s right to repay such obligations in cash. The conversion rate of this note generated a beneficial conversion feature that resulted in a note discount of $50,000. The note discount is being amortized as additional interest expense over the term of the note.

On April 28, 2009, the Company entered into an Amendment (the “Amendment”) to the Note Purchase Agreement dated as of January 9, 2009 with Platinum-Montaur Life Science, LLC. Pursuant to the Amendment the Company issued a 10% senior secured convertible promissory note in the principal amount of $40,000. This notes matures on October 9, 2009. The terms of this note are the same as the Note issued by the Company pursuant to the Purchase Agreement on January 9, 2009.  It is stipulated in the note that the proceeds from the issuance of this note shall be used by the Company to retain CEOcast, Inc. to render investor relations services to Urigen.

On June 12, 2009, the Company entered into an unsecured promissory note with C. Lowell Parsons, M.D. a director of the Company, in the amount of $15,000. 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 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The note is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  Dr. Parsons may, in his discretion, request payment of this note, in whole or in part in restricted common stock of the Company.  The rate of repayment in common stock is based on $0.15 per share.  At June 30, 2009 the Company owed accrued interest expense of $113.
 
Contractual Obligations

On November 1, 2008, the Company entered into a consulting agreement with FLP Pharma LLC pursuant to which Mr. Nida will provide consulting services to the Company for a term commencing on November 1, 2008 through December 31, 2009. The Consulting Agreement provides for compensation of $200 per hour for a maximum amount of 50 hours monthly. Also, the Consulting Agreement provides that the agreement may be terminated by either party upon two weeks prior written notice; provided however, if the agreement is terminated by Company, the Company shall be obligated to pay to Mr. Nida certain amounts owed pursuant to his employment agreement with the Company dated as of May 1, 2006.

On November 1, 2008, the Company entered into a consulting agreement with Dennis H. Giesing pursuant to which Dr. Giesing will provide consulting services to the Company for a term commencing on November 1, 2008 through November 1, 2009. Pursuant to the terms of the Consulting Agreement, Dr. Giesing will provide services to the Company on an “as needed” basis not to exceed 4 days per month at a rate of $2,000 per day. The Consulting Agreement provides that either party may terminate the agreement upon written notice.
 
Off Balance Sheet Arrangements
 
At June 30, 2009 and 2008, the only off balance sheet arrangements were the operating sublease payments of $1,083 and $3,211 per month, respectively,  to EGB Advisors, LLC. EGB Advisors, LLC is owned solely by William J. Garner, M.D. Chief Executive Officer of the Company. The fees are for rent, telephone and other office services which are based on estimated fair market value.
 
Results of Operations
 
Fiscal Years Ended June 30, 2009 and 2008
 
Revenue

There were no operating revenues for the years ended June 30, 2009 and 2008.
 
Research and Development Expenses

Research and development expenses were $195,139 and $684,304 for the years ended June 30, 2009 and 2008, respectively. The decrease was primarily due to reduction in staff and decreases in clinical trial expenses overall in the year ended June 30, 2009. 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

General and administrative expenses were $1,532,620 and $2,761,535 for the years ended June 30, 2009 and 2008, respectively. The decrease was due to decreased payroll, and legal and accounting fees in connection with the prior year’s Merger, convertible preferred stock transaction, and public company operating expenses.  We expect general and administrative expenses to increase going forward, in the long term, as we proceed to move our technologies forward toward commercialization.
 
 
 
 
31
 
 
 
Sales and Marketing Expenses

Sales and marketing expenses were $77,010 and $264,269 for the years ended June 30, 2009 and 2008, respectively. The decrease is mainly due to reduction in staff.  We expect sales and marketing expenses to increase going forward as we proceed to move our technologies forward toward commercialization.
 
Interest and Other Income and Expenses, net

    Interest income was $1,836 and $18,094 for the years ended June 30, 2009 and 2008, respectively. The decrease in interest income is mainly due to the lower average cash balances during the year.  We do not expect interest income to increase unless the Company is able to raise additional capital through an equity financing or a partnering arrangement.

    Interest expense was $189,892 and $2,235,286 for the years ended June 30, 2009 and 2008, respectively.  The decrease is due primarily to the prior year’s $2,100,000 of non-cash interest expense recorded in conjunction with the Series B convertible preferred stock which was classified as a liability at issuance.  This level of interest expense is not expected to reoccur.

    Other income and expenses net was $263,782 of expense and $1,082,842 of income for the years ended June 30, 2009 and 2008, respectively.  The change was predominantly due to mark-to-market valuations on Series B preferred stock classified as a liability during the year. In fiscal 2009, the issuance of a note resulted in a change to the conversion/exercise price per share of the Series B Convertible Preferred Stock issued pursuant to the terms of the Series B Convertible Preferred Stock Purchase Agreement dated as of July 31, 2007, from $0.15 per share to $0.10 per share which would result in the conversion of the Series B Preferred stock into 21 million shares of common stock instead of 14 million shares of common stock under the original agreement.  This increase in issuable shares upon conversion, coupled with the changes in our stock price resulted in an expense of $366,674.  This was offset by income of $100,000 related to a licensing agreement.  In fiscal year 2008, the change in our stock price resulted in approximately $950,000 of income.  This account will continue to fluctuate in the future as we apply mark-to-market accounting on our Series B preferred stock liability.
  
Liquidity and Capital Resources
 
As discussed elsewhere in this report, including further below, we have received a report from our independent registered public accounting firm regarding the consolidated financial statements for the fiscal year ended June 30, 2009 that includes an explanatory paragraph stating that the financial statements have been prepared assuming we will continue as a going concern. The explanatory paragraph and note 2 to our consolidated financial statements state the following conditions, which raise substantial doubt about our ability to continue as a going concern: we have incurred operating losses since inception, including a net loss of $2.26 million for the fiscal year ended June 30, 2009, negative cash flows from operations of $0.6 million for the fiscal year ended June 30, 2009, and our accumulated deficit was $11.89 million at June 30, 2009.  We anticipate requiring additional financial resources to enable us to fund the completion of our development plan. These funds may be derived from the sale of a current license, licensing and distribution agreements outside the U.S., corporate partnerships, and/or additional financing.  
 
If we are unable to obtain the required additional financial resources to enable us to fund current development projects  or the completion of the strategic opportunities that may be available to us, or if we are otherwise unsuccessful in completing any strategic alternative, our business, results of operation and financial condition would be materially adversely affected and we may be required to seek bankruptcy protection.
 
The Company currently subleases office facilities on a month-to-month basis at a rate of $1,083 per month from EGB Advisors, LLC. EGB Advisors, LLC is owned solely by William J. Garner, President and Chief Executive Officer of Urigen Pharmaceuticals, Inc.  The sublease is terminable upon 30 days’ notice.
 
Net cash used in operating activities for the year ended June 30, 2009 was $560,765, which primarily reflected the net loss of $2.26 million, adjusted for non-cash preferred Series B discount and imputed interest expense of $14,000, other non cash expenses of $240,128 and the net increase in operating assets and liabilities of approximately $1.06 million, and the change in the fair value of the Series B convertible preferred stock liability of $366,674. Net cash used in operating activities for the year ended June 30, 2008 was approximately $2.69 million, which primarily reflected the net loss of $4.84 million, adjusted for non-cash preferred Series B discount and imputed interest expense of $2.14 million, other non cash expenses of $234,560 and the net increase in operating assets and liabilities of approximately $705,000, offset by the change in fair value of the Series B preferred stock liability of $949,895.

Net cash provided by investing activities was approximately $1,000 for the fiscal year ended June 30, 2009, which primarily reflected the sale of surplus equipment in 2009.  Net cash used in investing activities of approximately $4,000 for the year ended June 30, 2008 related to the purchase of equipment in 2008.
 
 
 
32
 
 
Net cash provided by financing activities was $517,000 for the fiscal year ended June 30, 2009, which reflected the issuance of notes payable, including $497,000 to related parties.  Net cash provided by financing activities was approximately $2.64 million for the fiscal year ended June 30, 2008, which primarily reflected the $2.10 million receipt of proceeds from the issuance of Series B preferred stock, $318,000 in proceeds from common stock subscriptions, and $222,351 of cash acquired in the Merger. 
  
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Our consolidated financial statements and notes thereto appear on pages 45 to 75 of this Annual Report on Form 10-K.  The quarterly financial information (unaudited) is described in Note 18 of the consolidated financial statements.
 
ITEM 7A.
          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Urigen’s exposure to market risk for changes in interest rates relates primarily to our cost of capital and our ability to raise capital. We maintain a strict investment policy that is designed to limit default risk, market risk, and reinvestment risk. Our cash consists of cash and money market accounts.  The balance of our accounts as of June 30, 2009 and 2008 was $2,805 and $45,509, respectively.
 
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Our consolidated financial statements and notes thereto appear on pages 45 to 75 of this Annual Report on Form 10-K.
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE

None.
 
ITEM 9A(T).
CONTROLS AND PROCEDURES

                  Evaluation of Disclosure Controls and Procedures. The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Our Chief Executive Officer and Chief Financial Officer have concluded, based on the evaluation of the effectiveness of the disclosure controls and procedures by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report, that our disclosure controls and procedures were not effective for this purpose.

Management’s Annual Report on Internal Control over Financial Reporting.  Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
 
  ●
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets;
 
  ●
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

  ●
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
As of the end of the period covered by this report, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, completed our evaluation of the effectiveness of our internal control over financial reporting, which we had been conducting based on the criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treasury Commission (“COSO”).
 
 
 
33
 

 
Management completed its assessment of internal control over financial reporting, and has identified material weaknesses that existed in the design or operation of our internal control over financial reporting. The Public Company Accounting Oversight Board has defined a material weakness as a “deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses were identified in our 2008 assessment and remain in our 2009 assessment:
 
  ●
Management noted an insufficient quantity of experienced, dedicated resources involved in control activities and financial reporting. This material weakness contributed to a control environment where there is a reasonable possibility that a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.
 
  ●
The Company’s design and operation of controls with respect to the process of preparing and reviewing the annual and interim financial statements are ineffective. This material weakness includes failures in the design and operating effectiveness of controls which would insure (i) preparation of financial statements and disclosures on a timely basis; (ii) that all journal entries and financial disclosures are thoroughly reviewed and approved internally and documentation of this review process is retained; (iii) adequate separation of duties in the reporting process, and (iv) timely reconciliation of balance sheet and expense accounts.  These control deficiencies could result in a material misstatement of the financial statements due to the significance of the financial closing and reporting process to the preparation of reliable financial statements.
 
            This annual report does not include an attestation report of our independent registered public accounting firm regarding the effectiveness of internal control over financial reporting. The effectiveness of internal control over financial reporting was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

              Changes in Internal Controls. In connection with its audit of our consolidated financial statements for the year ended June 30, 2009, Burr, Pilger & Mayer LLP identified significant deficiencies, which represent material weaknesses. The material weaknesses were related to a lack of adequate segregation of duties and experienced personnel particularly in the area of equity transactions and financial reporting that were the result of an insufficient quantity of experienced resources involved with the financial reporting and year end closing process.  

      Prior to the issuance of our consolidated financial statements, we completed the account reconciliations, analyses and our management review such that we can certify that the information contained in our consolidated financial statements for the year ended June 30, 2009, fairly presents, in all material respects, the financial condition and results of operations of the Company.

                 Limitations on Effectiveness of Controls and Procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

ITEM 9B.
OTHER INFORMATION
 
None. 
 
 

 
34
 


 
PART III
 
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
Executive Officers and Directors

The following table lists the names and ages and positions of our current executive officers and directors.  Each of the executive officers was appointed on July 16, 2007, with the exception of Mr. Robert Watkins who was appointed September 28, 2007, Ms. Cynthia Sullivan, who was appointed on November 2, 2007 and Dr. Michael Goldberg who was appointed on June 11, 2009.
 
Name
  
Age
  
 Position
  
           
William J. Garner, M.D.
  
43
  
President, Chief Executive Officer and Director
  
Martin E. Shmagin
  
59
  
Chief Financial Officer and Director
  
C. Lowell Parsons, M.D.
  
65
  
Director
  
George M. Lasezkay, Pharm.D., J.D.
  
57
  
Director
  
Cynthia Sullivan
  
53
  
Director
  
Michael M. Goldberg, M.D.
  
51
  
Director
  
Robert Watkins
  
66
  
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., 43, was appointed President and Chief Executive Officer on July 13, 2007.  Prior to that date, Dr. Garner was President and Chief Executive Officer of Urigen N.A., Inc.  Dr. Garner is an experienced entrepreneur. Prior to founding Urigen N.A., Dr. Garner had been the founder and managing director of EGB Advisors, LLC, a pharmaceutical commercialization boutique. Through this entity, Dr. Garner worked on a number of biopharmaceutical business transactions and has raised financing for another company that he founded called Inverseon, Inc., developing a novel therapy for asthma. Before this, Dr. Garner worked in medical affairs at Hoffmann LaRoche in oncology. Prior to Hoffmann LaRoche, Dr. Garner was in the venture capital department at Paramount Capital Investments in New York City. Dr. Garner has a Master of Public Health from Harvard and received his M.D. degree from New York Medical College. Dr. Garner did his residency training in Anatomic Pathology at Columbia-Presbyterian and is currently a licensed physician in the State of New York.
 
Martin E. Shmagin, 59, was appointed as our Chief Financial Officer on July 13, 2007. Prior to that date, Mr. Shmagin served as Chief Financial Officer of Urigen N.A., Inc. For over ten years Mr. Shmagin served as President of Innovative Financial Solutions Ltd., an accounting and financial consulting firm that serves as chief financial officer and controller for start-up through mid-size businesses. From 1978 to 1986, Mr. Shmagin was Vice President, Finance/Chief Financial Officer of Fisher & Brother, Inc. From 1986 to 1989, he was Comptroller of Strober Bros., Inc. and supported the company’s successful initial public offering. He then opened his own consulting firm where he assisted Stenograph Corporation with its acquisition of Baron Data Corporation and Hanover Direct with its acquisition of Gumps. He also supported a $24 million global systems conversion of American President Companies, Ltd., a $2.6 billion transportation company, where he coordinated the data conversion of eighty-three subsidiaries in multiple currencies. Mr. Shmagin holds a B.S. degree in accounting from New York University.
 
C. Lowell Parsons, M.D., 65, 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 at UCSD.
 
George M. Lasezkay, Pharm.D., J.D., 57, 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 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.


 
35
 

Cynthia Sullivan, 53, 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.
 
Michael M. Goldberg, M.D., 51, a director of Urigen since June 11, 2009, currently serves as managing partner of Montaur Capital Partners, an investment firm, a position he has held since January 2007. From August 1990 to January 2007, Dr. Goldberg was chairman and chief executive officer of Emisphere Technologies, Inc., a biopharmaceutical company. Prior to this, Dr. Goldberg was a vice president for The First Boston Corporation, where he was a founding member of the Healthcare Banking Group. He received a B.S. from Rensselaer Polytechnic Institute, an M.D. from Albany Medical College of Union University and an M.B.A. from Columbia University Graduate School of Business. Dr. Goldberg also serves on the board of directors of Adventrx Pharmaceuticals, Inc.

Robert Watkins, 66, 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.
 

Committees of the Board of Directors
 
Our Board of Directors has a standing Audit Committee, Compensation Committee and Nominating and Governance Committee.
  
  Audit Committee
 
The Audit Committee meets with the independent registered accounting firm at least annually to review the results of the annual audit and discuss the financial statements, recommends to the Board of Directors the independent registered accounting firm to be retained and receives and considers the accountants’ comments as to controls, adequacy of staff and management performance and procedures in connection with the audit and internal controls. The Audit Committee also meets with the independent registered accounting firm to review the quarterly financial results and to discuss the results of the independent registered accounting firm’s quarterly review and any other matters required to be communicated to the Audit Committee by the independent registered accounting firm under generally accepted auditing standards. During the fiscal year ended June 30, 2009, the Audit Committee was composed of three directors: Dr. McGraw, Ms. Sullivan and Mr. Taylor.  Ms. Sullivan and Mr. Taylor are independent non-employee directors.  Dr. McGraw served as President and Chairman of the Board of Valentis Inc., from September 1994 through July 13, 2007.  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 Company’s 2004 Annual Meeting of Stockholders.  Mr. Taylor and Dr. McGraw resigned from the board of directors on June 8, 2009 and July 21, 2009 respectively.

AUDIT COMMITTEE EXPERT
The chairman of our audit committee was Mr. Tracy Taylor.  He was an independent director of the Company. Mr. Taylor tendered his resignation as Chairman of the Board on June 30, 2009.  There were no disagreements with the company that led to Mr. Taylor’s resignation.  His attributes as an audit committee financial expert were:
(1) An understanding of generally accepted accounting principles and financial statements;
(2) The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;
(3) Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company's financial statements, or experience actively supervising one or more persons engaged in such activities;
(4) An understanding of internal controls and procedures for financial reporting; and
(5) An understanding of audit committee functions.
As of the filing of this Form 10-K, the company has not yet appointed a new Chairperson of the Audit Committee.
 
Compensation Committee
 
The Compensation Committee makes recommendations concerning salaries and incentive compensation, awards stock options to employees and consultants under the Company’s stock option plans and otherwise determines compensation levels and performs such other functions regarding compensation as the Board of Directors may delegate. During the fiscal year ended June 30, 2009, the Compensation Committee was composed of three directors: Mr. Watkins and Drs. McGraw and Lasezkay. Mr. Watkins and Dr. Lasezkay are independent non-employee directors.  Dr. McGraw served as President and Chairman of the Board of Valentis Inc., from September 1994 through July 13, 2007. 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 Company’s 2004 Annual Meeting of Stockholders.  Details of stock compensation and stock option award plans are described in Note 14 - Equity Compensation of the notes to the consolidated financial statements included in this annual report. Dr. McGraw resigned from the board of directors on July 21, 2009.
 
 
 
 
36
 
 
Nominating and Governance Committee
 
The Nominating and Governance Committee assists the Board of Directors in discharging the Board of Directors’ responsibilities regarding identifying qualified candidates to become members of the Board of Directors, selecting candidates to fill any vacancies on the Board of Directors, ensuring that we have and follow the appropriate governance standards and overseeing the evaluation of the Board of Directors. During the fiscal year ended June 30, 2009, the Nominating and Governance Committee was composed of three directors: Mr. Taylor and Drs. McGraw and Lasezkay.  Mr. Taylor and Dr. Lasezkay are independent non-employee directors.  Dr. McGraw served as President and Chairman of the Board of Valentis Inc., from September 1994 through July 13, 2007.  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 Company’s 2004 Annual Meeting of Stockholders.  Mr. Taylor and Dr. McGraw resigned from the board of directors on June 8, 2009 and July 21, 2009 respectively.
 
The Nominating and Governance Committee will consider and has adopted a policy with regard to the consideration of any director candidates recommended by security holders. The Nominating and Governance Committee uses a process similar to that contained in the Nominating and Governance Committee Charter for identifying and evaluating director nominees recommended by our stockholders. In the fiscal year ended June 30, 2009, 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 Company compensates our outside directors as follows: For compensation purposes Dr. Parsons, Dr. Garner, and Mr. Shmagin are not considered outside directors.  Each director receives an annual retainer of $15,000 and a per meeting fee of $1,000. The chairman of the board receives an additional annual retainer of $10,000.  The chairman of the Audit Committee receives an annual retainer of $4,500 and a per meeting fee of $500 and the other members of the Audit Committee receive 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 $500 and the other members of the Compensation Committee receive a per meeting fee of $500. The chairman of the Nominating and Governance Committee receives an annual retainer of $3,500 and a per meeting fee of $500 and the other members of the Nominating and Governance Committee receive 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.

On January 7, 2008, each outside Board member was granted 46,500 shares of common stock to be issued after one year of service.

For the fiscal year ended June 30, 2009, director compensation expense was accrued as follows:

                                     
                                     
         
Board
    
Board
    
Audit
    
Compensation
    
Governance
  
Director
  
Total
    
Member Fees
    
Meeting Fees
    
Member Fee
    
Member Fee
    
Member Fee
  
William Garner
   $ -     $ -     $ -     $ -     $ -     $ -  
Martin Shmagin
     -       -       -       -       -       -  
Lowell Parsons
     -       -       -       -       -       -  
George Lasezkay
     32,000       15,000       13,000       -       4,000       -  
Cynthia Sullivan
     32,000       15,000       15,000       2,000       -       -  
Robert Watkins
     33,000       15,000       14,000       -       500       3,500  
Benjamin McGraw
     34,500       15,000       16,000       1,000       500       2,000  
Total
   $ 131,500     $ 60,000     $ 58,000     $ 3,000     $ 5,000     $ 5,500  
 
Compliance with Section 16(a) of the Exchange Act
 
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) requires that our directors, executive officers and persons who own more than ten percent of a registered class of our equity securities, file reports of ownership and changes in ownership (Forms 3, 4 and 5) with the Securities and Exchange Commission. Our directors, executive officers and, beneficial owners of more than ten percent of our common stock are required to furnish us with copies of all of these forms, which they file.
 
Based solely upon our review of these reports, any amendments thereto or written representations from certain reporting persons, we believe that during the fiscal year ended June 30, 2009 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, other than the following: (i) Martin Shmagin on (a) a Form 4 filed with the SEC on January 30, 2009 to report the acquisition of common stock on January 27, 2009, (b) a Form 4 filed with the SEC on February 3, 2009 to report the acquisition of common stock on January 29, 2009, (c) a Form 4 filed with the SEC on March 10, 2009 to report the acquisition of common stock on March 5, 2009, (d a Form 4 filed with the SEC on March 13, 2009 to report the acquisition of common stock on March 9, 2009; (ii) William J. Garner on (a) a Form 4 filed with the SEC on January 29, 2009 to report the acquisition of common stock on January 26, 2009, (b) a Form 4 filed with the SEC on February 3, 2009 to report the acquisition of common stock on January 29, 2009, (c) a Form 4 filed with the SEC on March 18, 2009 to report the acquisition of common stock on March 13, 2009; (iii) C. Lowell Parsons on (a) a Form 3 filed with the SEC on March 2, 2009 to report his initial ownership of common stock of the Company as of August 13, 2007, (b) a Form 4 filed with the SEC on March 2, 2009 to report the acquisition of common stock on February 25, 2009, (c) a Form 4 filed with the SEC on March 9, 2009 to report the acquisition of common stock on March 3, 2009, (d) a Form 4 filed with the SEC on March 26, 2009 to report the acquisition of common stock on March 17, 2009, (e) a Form 4 filed with the SEC on May 29, 2009 to report the acquisition of common stock on May 22 and May 26, 2009, (f) a Form 4 filed with the SEC on June 5, 2009 to report the acquisition of common stock on June 1, 2009, (g) a Form 4 filed with the SEC on August 5, 2009 to report the acquisition of common stock on July 28, 2009; and (iv) Michael Goldberg on (a) Form 4 filed on September 18, 2009 to report a transaction that occurred on August 13, 2009.
 
 
 
37
 
 
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 Chief Financial Officer, 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 E. Shmagin, Chief Financial Officer, 27 Maiden Lane, Suite 595, San Francisco, CA 94108. We intend to disclose any amendment to, or a waiver from, a provision of our Code of Business Conduct and Ethics that applies to our 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 our website www.urigen.com.

EXECUTIVE COMPENSATION
 
Summary Compensation Table

The following table shows for the fiscal years ended June 30, 2009 and 2008, 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 years ended June 30, 2009 and 2008, referred to as our named executive officers: 

     
 
  
 
          
 
    
All
      
                     
Stock
    
Other
      
Name and Principal Position
Fiscal Year
  
Salary
    
Bonus
    
Awards
    
Compensation
       Total
                                   
William J. Garner M.D, President,
2009
$
  250,000
(1)
 $
 —
  
 $
 —
  
 $
 —
      
    Chief Executive Officer, and Director
2008
$
  250,000
(2)
 $
 —
  
 $
 —
  
 $
 —
      
                               
Martin E. Shmagin,
    
2009
$
  225,000
(3)
 $
 —
  
 $
 —
  
 $
 —
      
    Chief Financial Officer
2008
$
  225,000
(4)
 $
 —
  
 $
 —
  
 $
 —
      
                               
Dennis Giesing, Chief Scientific Officer
2009
$
   73,333
(5)
 $
 —
  
 $
      74,699 (7)
 
 $
 —
      
     
2008
$
  183,333
(6)
 $
 —
  
 $
      13,869 (7)
 
 $
4,000 (8)
  
 
  
                                   
Terry M. Nida, Chief Operating Officer
2009
$
   62,933
(9)
 $
 —
  
 $
 —
  
 $
 —
      
     
2008
$
  187,974
(10)
 $
 —
  
 $
 —
  
 $
225,000 (11)
  
 
  
 
                                     
                               
 
(1) Salary is all accrued but unpaid.
                                
                                     
(2) Salary includes $145,833 of cash payments and $104,167 of accrued but unpaid salary.
              
                                     
(3) Salary is all accrued but unpaid.
                                
                                     
(4) Salary includes $131,250 of cash payments and $ 93,750 of accrued but unpaid salary.
              
                                     
(5) Salary is all accrued but unpaid.  Dr. Giesing resigned from his position effective October 30, 2008.
          
                                     
(6) Salary includes $91,667 of cash payments and $91,666 of accrued but unpaid salary.
              
                                     
(7) 2008 restricted stock award (RSA) expense, recognized in 2008 and 2009.
                    
                                     
(8) Represents payment on an independent consulting agreement from December, 2006.
              
                                     
(9) Salary is all accrued but unpaid.  Mr. Nida resigned from his position effective October 27, 2008.
            
                                     
(10) Salary includes $109,307 of cash payments and $78,667 of accrued but unpaid salary.
              
                                     
(11) Mr. Nida received 10,000 shares Series B Preferred Stock as an independent consultant, monthly from October 1, 2006
    
     through June 30, 2007.  The shares were issued at a fair value of $2.50 per share and converted on July 13,2007 to 1,014,944
  
     shares of Urigen Pharmaceuticals, Inc. common stock.
                          
                                     
 
38
 


Stock Option Grants and Exercises

None.
 
Employment Agreements
 
 
On August 6, 2008, the Company entered into an employment agreement with William J. Garner, M.D., its Chief Executive Officer since July 2007 (the "Garner Agreement"). Pursuant to the terms of the Garner Agreement, Dr. Garner shall serve as President and Chief Executive Officer of the Company for a term of two years which shall be renewed for successive one-year terms unless terminated by either party upon written notice 30 days prior to the expiration of the term. The Garner Agreement provides for an annual base salary of $250,000 during the first year of the initial term of the Garner Agreement, and a bonus based upon the discretion of the Board of Directors.
 
In the event the Company terminates Dr. Garner for any reason other than for cause, death or disability or Dr. Garner terminates the Garner Agreement for good reason (as defined in the Garner Agreement), the Company shall (i) pay any accrued but unpaid compensation in a lump sum payment within thirty days and (ii) continue to pay the annual base salary and bonus for the greater of the remainder of the term or for a period of twelve months. However, if during the six months after a non-negotiated change of control (as defined in the Garner Agreement), either the Company or Dr. Garner terminates the Garner Agreement for any reason or no reason or Dr. Garner is terminated at any time without cause (as defined in the Garner Agreement) or Dr. Garner terminates his employment for good reason (as defined in the Garner Agreement), the Company shall pay to Dr. Garner a lump sum in cash within thirty (30) days after the date of termination in an amount equal to twenty four (24) months of his annual base salary.
 
If Dr. Garner's employment is terminated by the Company for cause or if Dr. Garner terminates his employment other than for good reason (as defined in the Garner Agreement), Dr. Garner shall receive the accrued but unpaid portion of his annual base salary and bonus, if any.
 
Under the terms of the Garner Agreement, Dr. Garner shall be entitled to customary benefits and expense reimbursements.
 
Dr. Garner also agreed to customary non-solicitation and non-competition provisions.
 
On August 6, 2008, the Company also entered into an employment agreement with Martin E. Shmagin, our Chief Financial Officer since July 2007 (the "Shmagin Agreement"). Pursuant to the terms of the Shmagin Agreement, Mr. Shmagin shall continue to serve as Chief Financial Officer of the Company for a term of two years which shall be renewed for successive one-year terms unless terminated by either party upon written notice 30 days prior to the expiration of the term. The Shmagin Agreement provides for an annual base salary of $225,000 during the first year of the initial term of the Shmagin Agreement, and a bonus based upon the discretion of the Board of Directors.
 
In the event the Company terminates Mr. Shmagin for any reason other than for cause, death or disability or Mr. Shmagin terminates the Shmagin Agreement for good reason (as defined in the Shmagin Agreement), the Company shall (i) pay any accrued but unpaid compensation in a lump sum payment within thirty days and (ii) continue to pay the annual base salary and bonus for the greater of the remainder of the term or for a period of twelve months. However, if during the six months after a non-negotiated change of control (as defined in the Shmagin Agreement), either the Company or the Mr. Shmagin terminates the Shmagin Agreement for any reason or no reason or Mr. Shmagin is terminated at any time without cause (as defined in the Shmagin Agreement) or Mr. Shmagin terminates his employment for good reason (as defined in the Shmagin Agreement), the Company shall to Mr. Shmagin a lump sum in cash within thirty (30) days after the date of termination in an amount equal to twenty four (24) months of his annual base salary.
 
If Mr. Shmagin employment is terminated by the Company for cause or if Mr. Shmagin terminates his employment other than for good reason (as defined in the Shmagin Agreement), Mr. Shmagin shall receive the accrued but unpaid portion of his annual base salary and bonus, if any.
 
Under the terms of the Shmagin Agreement, Mr. Shmagin shall be entitled to customary benefits and expense reimbursements.
 
Mr. Shmagin also agreed to customary non-solicitation and non-competition provisions.
 
 
Director Compensation
       
 
              
Name
  
Fiscal Year
  
Fees Earned or Paid in Cash
    
Stock
Awards
    
Total
  
                       
William Garner
  
2009
   $ -     $ -     $ -  
   
2008
   $ -     $ -     $ -  
Martin Shmagin
  
2009
   $ -     $ -     $ -  
   
2008
   $ -     $ -     $ -  
Lowell Parsons
  
2009
   $ -     $ -     $ -  
   
2008
   $ -     $ -     $ -  
George Lasezkay
  
2009
   $ 32,000     $ -     $ 32,000  
   
2008
   $ 26,500     $ 3,092     $ 29,592  
Cynthia Sullivan
  
2009
   $ 32,000     $ 1,436     $ 33,436  
   
2008
   $ 21,000     $ 3,092     $ 24,092  
Robert Watkins
  
2009
   $ 33,000     $ 1,436     $ 34,436  
   
2008
   $ 24,500     $ 3,092     $ 27,592  
Benjamin McGraw
  
2009
   $ 32,500     $ 1,436     $ 33,936  
   
2008
   $   25,000     $   3,092     $   28,092  
 
Compensation Committee Interlocks and Insider Participation
 
During the fiscal year ended June 30, 2009, none of the Company’s executive officers served on the board of directors of any entities whose directors or officers serve on the Company’s Compensation Committee. No current or former executive officer or employee of the Company serves on the Compensation Committee.
 
 
 
39
 


 
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT  AND RELATED STOCKHOLDER MATTERS

The following table provides information at to shares of common stock beneficially owned as of September 23, 2009 by:
 
·  
          each director;
 
·  
          each officer named in the summary compensation table;
 
·  
         each person owning of record or known by us, based on information provided to us by the persons named below, to own beneficially at least 5% of our common stock; and
 
·  
         all directors and executive officers as a group.
 
 
Unless otherwise indicated, the persons named in the table below have sole voting and investment power with respect to the number of shares indicated as beneficially owned by them. Furthermore, unless otherwise indicated, the address of the beneficial owner is c/o Urigen Pharmaceuticals, Inc. 27 Maiden Lane, Suite 595, San Francisco, CA 94108. 

Name
  
Shares of Common Stock Beneficially Owned
Percentage (1)
William J. Garner M.D., President, Chief Executive Officer and Director
    
18,587,340
      
25.29
%
Martin E. Shmagin, Chief Financial Officer and Director
    
3,138,573
      
4.27
%
Michael Goldberg, Director
    
*
      
*
  
Benjamin F. McGraw, Pharm.D, Director
    
1,391,804
      
1.89
%
Tracy Taylor, Director, Chairman of the Board
    
*
      
*
  
C. Lowell Parsons, M.D., Director
    
1,925,693
      
2.62
%
George M. Lasezkay, Pharm.D., J.D., Director
    
*
      
*
  
Cynthia Sullivan, Director
    
*
      
*
  
Robert Watkins, Director
    
*
      
*
  
All officers and directors as a group (5 individuals owning stock)
    
25,238,910
      
34.34
%
                 
* Less than 1%
                
                 
(1) Based upon 73,494,327 shares issued and outstanding as of September 22, 2009.
 
Except as otherwise indicated each person has the sole power to vote and dispose of all shares of common stock beneficially owned listed opposite his or her name.  Each person is deemed to own beneficially shares of common stock which are issuable upon exercise of warrants or options or upon conversion of convertible securities if they are exercisable or convertible within 60 days of October 1, 2009.

The assumptions and fair value accounting for stock based compensation plans is described in Note 14 of the consolidated financial statements included in this report.
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
As of June 30, 2009 and 2008, the Company is paying a fee of $1,083 and $3,211 per month to EGB Advisors, LLC. EGB Advisors, LLC is owned solely by William J. Garner, M.D. Chief Executive Officer of the Company.  The fees are for rent, telephone and other office services which are based on estimated fair market value.  As of June 30, 2009 and 2008, Dr. Garner and EGB Advisors, LLC were owed $6,007 and $0, respectively. From the inception of the Company to June 30, 2009 and 2008, respectively, the Company has paid $190,530 and $175,428 to these related parties.

Several stockholders provided consulting services and were paid $174,208 and $171,708 for those services from the inception of the Company to June 30, 2009 and 2008, respectively.  As of June 30, 2009 and 2008, respectively, $456 and $456 was owed to these consultants.
 
 
 
 
40
 
 
As of June 30, 2009 and 2008, the Company’s legal counsel in Canada was owed $67,169 and $67,169, respectively.  From the inception of the Company to June 30, 2009 and 2008, the Company paid $78,299 and $78,299, respectively, for legal expenses to the related party stockholders’ company.

As of June 30, 2009 and 2008, the Company’s legal counsel was owed $102,861 and $102,861, respectively. From the inception of the Company to June 30, 2009 and 2008, the Company paid $173,325 and $173,325, respectively, for legal expenses to the related party stockholder’s company.
 
On August 27, 2007, the Company settled a debt with one of its former legal counsels.  As part of the settlement, the Company paid $15,132 on behalf of Inverseon, Inc.  William J. Garner, M.D., the Chief Executive Officer and a director and Martin E. Shmagin, the Chief Financial Officer and a director are also officers, directors and shareholders in Inverseon, Inc.  On August 22, 2008, Inverseon, Inc. converted its $15,132 receivable to an unsecured promissory note. As of June 30, 2009, $1,559 of accrued interest was due the Company.
 
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Fees paid or accrued by the Company for services provided by the Company’s independent registered accounting firm, Burr, Pilger & Mayer LLP (BPM), for fiscal years 2009 and 2008 are as follows: 

Audit Fees:   The aggregate fees billed for professional services rendered for the audit of the Company's annual financial statements and review of the financial statements included in the Company’s Forms 10-Q, and services in connection with statutory and regulatory filings for the fiscal years ended June 30, 2009 and 2008 were $191,758 and $223,890 respectively.

Audit Related Fees: None

Tax Fees: None

All Other Fees: None
 
    Pre-Approval Policy for Services by Independent Registered Accounting Firm:  During fiscal years 2009 and 2008, all services provided by BPM were pre-approved by the Audit Committee. Pursuant to our Audit Committee Charter, before the independent registered accounting firm is engaged by Urigen Pharmaceuticals Inc. to render audit or non-audit services, the Audit Committee pre-approves the engagement. Audit Committee pre-approval of audit and non-audit services is not required if the engagement for the services is entered into pursuant to pre-approval policies and procedures established by the Audit Committee regarding the Company’s engagement of the independent registered accounting firm. The Audit Committee has established a pre-approved policy and procedure where pre-approval of specific audit and non-audit services that equal or are not expected to exceed $30,000 is not required so long as the Audit Committee is informed of each service provided by the independent registered accounting firm and such policies and procedures do not result in the delegation of the Audit Committee’s responsibilities under the Securities Exchange Act of 1934, as amended. Audit and non-audit services expected to exceed $30,000 require pre-approval of such audit and non-audit services by the Audit Committee. The Audit Committee may delegate to one or more designated members of the Audit Committee the authority to grant pre-approvals, provided such approvals are presented to the Audit Committee at a subsequent meeting. Audit Committee pre-approval of non-audit services other than review and attest services also is not required if such services fall within available exceptions established by the Securities and Exchange Commission.
 
 
 
41
 


 

PART IV
 
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a)(1)    Index to Financial Statements
 
The Financial Statements and report of the independent registered accounting firm required by this item are submitted in a separate section beginning on page 44 of this Report.

   
Page No.
Report of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting Firm
    
44
  
         
Consolidated Balance Sheets
    
45
  
Consolidated Statements of Operations
    
46
  
Consolidated Statements of Stockholders’ Equity (Deficit)
    
47-51
  
Consolidated Statements of Cash Flows
    
52
  
Notes to Consolidated Financial Statements
    
53
  
 
(a)(2)        No schedules have been filed, as they were not required or are inapplicable and therefore have been omitted.
 
(a)(3)        Exhibits 
 
Exhibit
Footnote
  
Exhibit
Number
  
Description of Document
         
(10)
  
3.1
  
Amended and Restated Certificate of Incorporation of the Registrant.
(1)
  
3.2
  
Bylaws of the Registrant.
(3)
  
3.3
  
Certificate of Designations of Series A Convertible Redeemable Preferred Stock.
(4)
  
3.4
  
Certificate of Amendment to the Bylaws of the Registrant.
(1)
  
10.5
  
Form of Indemnification Agreement entered into between the Registrant and its directors and executive officers.
(13)
  
10.33
  
Employment Agreement, dated August 6, 2008, between the Company and William J. Garner M.D.
(13)
  
10.34
  
Employment Agreement, dated August 6, 2008, between the Company and Martin E. Shmagin.
(26)
   10.35  
Series B Convertible Preferred Stock Purchase Agreement dated as of July 31, 2007 between Urigen Pharmaceuticals, Inc. and Platinum-Montaur Life Sciences, LLC
(26)
   10.36  
Registration Rights Agreement dated as of August 1, 2007 between Urigen Pharmaceuticals, Inc. and Platinum-Montaur Life Sciences, LLC
(26)
   10.37  
Form of Warrant issued to Platinum-Montaur Life Sciences, LLC
(27)
      
Amendment to Agreement between Valentis, Inc., Acacia Patent  Acquisition Corporation and Urigen Pharmaceuticals, Inc.
(28)  
10.38
  
Employment Agreement, dated as of August 6, 2008, by and between Urigen Pharmaceuticals, Inc. and William J. Garner.
(28)  
10.39
  
Employment Agreement, dated as of August 6, 2008, by and between the Company and Martin E. Shmagin.
(29)
 
  
10.40
 
  
Amendment No. 2 to the License Agreement effective June 6, 2004 between the Company and the Regents of the University of California for Invention Docket Nos. SD2003-049 and SD2004-134 “Novel Intravesical Therapy for immediate symptom relief and Chronic Therapy in Interstitial Cystitis Patients.
(30)  
10.41
  
Note Purchase Agreement dated January 9, 2009 by and between Urigen Pharmaceuticals, Inc. and Platinum-Montaur Life Sciences, LLC
(30)   10.42  
Senior Secured Convertible Promissory Note dated January 9, 2009.
(30)  
10.43
  
Security Agreement dated January 9, 2009, among Urigen Pharmaceuticals, Inc., Urigen N.A., Inc. and Platinum-Montaur Life Sciences, LLC
(30)  
10.44
  
The Patent, Trademark and Copyright Security Agreement among Urigen Pharmaceuticals, Inc., Urigen N.A., Inc. and Platinum-Montaur Life Sciences, LLC
(30)  
10.45
  
The Guaranty by Urigen N.A. in favor of Platinum-Montaur Life Sciences, LLC
(31)   10.46  
Amendment dated April 28, 2009 by and between Urigen Pharmaceuticals, Inc. and Platinum-Montaur Life Sciences, LLC 
(31)   10.47   Senior Secured Convertible Promissory Note dated April 28, 2009.
(32)  
10.49
  
Amendment dated August 13, 2009 by and between Urigen Pharmaceuticals, Inc. and Platinum-Montaur Life Sciences, LLC
(32)    10.50  
Senior Secured Convertible Promissory Note dated August 13, 2009
(33)
 
  
10.51
 		  
Amendment No. 3 to the License Agreement effective June 6, 2004 between the Company and the Regents of the University of California for Invention Docket Nos. SD2003-049 and SD2004-134 “Novel Intravesical Therapy for immediate symptom relief and Chronic Therapy in Interstitial Cystitis Patients.
(34)   14.1  
Urigen Pharmaceuticals Inc. Code of Business Conduct and Ethics, effective May 15, 2008
   
21.1
  
Subsidiaries of the Registrant **
   
23.1
  
Consent of Independent Registered Accounting Firm **
   
31.1
  
Certification of Principal Executive Officer Section 302.**
   
31.2
  
Certification of Principal Financial Officer Section 302.**
   
32.1
  
Certification of Principal Executive Officer Section 906.**
   
32.2
  
Certification of Principal Financial Officer Section 906.**
 
 
(13) Filed as an exhibit to the Report on Form 8-K, filed with the Securities and Exchange Commission on August 8, 2008 and incorporated herein by reference.
  
(26) Filed as an exhibit to the Report on Form 8-K filed with the Securities and Exchange Commission on August 6, 2007 and incorporated herein by reference.
 
(27) Filed as an exhibit to the Report on Form 8-K filed with the Securities and Exchange Commission on August 10, 2007 and incorporated herein by reference.
 
(28) Filed as an exh ibit to the Report on Form 8-K filed with the Securities and Exchange Commission on August 11, 2008 and incorporated herein by reference.
 
(29) Filed as an exhibit to the Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2008 and incorporated herein by reference.
 
(30) Filed as an exhibit to the Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009 and incorporated herein by reference.
 
(31) Filed as an exhibit to the Report on Form 8-K filed with the Securities and Exchange Commission on April 20, 2009 and incorporated herein by reference.
 
(32) Filed as an exhibit to the Report on Form 8-K filed with the Securities and Exchange Commission on August 20, 2009 and incorporated herein by reference.
 
(33) Filed as an exhibit to the Report on Form 8-K filed with the Securities and Exchange Commission on August 26, 2009 and incorporated herein by reference.
 
(34) Filed as an exhibit to the Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2008 and incorporated herein by reference.
 
**
Filed herewith


 
42
 

 
 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on September 24, 2009 .
 
 
         
     
/s/ William J. Garner, M.D.
  
 
    
WILLIAM J. GARNER, M.D.
  
     
President and Chief Executive Officer (Principal Executive Officer)
  
 
 
         
 
    
/s/ Martin E. Shmagin
  
     
MARTIN E. SHMAGIN
  
 
    
Chief Financial Officer
(Principal Financial and Accounting Officer)
  
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
  
Title
  
Date
         
/s/ William J. Garner
  
President, Chief Executive Officer and Director
  
September 24, 2009
WILLIAM J. GARNER, M.D.
  
(Principal Executive Officer)
    
         
/s/ Martin E. Shmagin
  
Chief Financial Officer and Director
  
September 24, 2009
MARTIN E. SHMAGIN
  
(Principal Financial and Accounting Officer)
    
         
/s/ George M. Lasezkay
  
Director
  
September 24, 2009.
GEORGE M. LASEZKAY, JD, Pharm. D.
        
         
/s/ Michael M. Goldberg
  
Director
  
September 24, 2009
MICHAEL M. GOLDBERG, M.D.
        
         
/s/ C. Lowell Parsons
  
Director
  
September 24, 2009
C. LOWELL PARSONS, M.D.
        
         
 /s/ Cynthia Sullivan
  
Director
  
September 24, 2009
CYNTHIA SULLIVAN
        
         
 /s/ Robert J. Watkins
  
Director
  
September 24, 2009
ROBERT J. WATKINS
        
 
 
 
43
 


 



Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Stockholders of
Urigen Pharmaceuticals, Inc.


We have audited the accompanying consolidated balance sheets of Urigen Pharmaceuticals, Inc. (a development stage company) and its subsidiaries (the “Company”) as of June 30, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended and cumulatively for the period from July 18, 2005 (date of inception) to June 30, 2009.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Urigen Pharmaceuticals, Inc. and its subsidiaries as of June 30, 2009 and 2008, and the results of their operations and their cash flows for the years then ended and cumulatively for the period from July 18, 2005 (date of inception) to June 30, 2009 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, the Company’s recurring losses from operations, negative cash flow from operations and accumulated deficit raise substantial doubt about its ability to continue as a going concern.  Management’s plans as to these matters are also described in Note 2.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
     
       
 
By:
/s/ Burr, Pilger & Mayer LLP
  
       
Palo Alto, California
      
September 23, 2009
      
 
 
 
44
 
 
URIGEN PHARMACEUTICALS, INC.

(a development stage company)
 
CONSOLIDATED BALANCE SHEETS
 
______________
 
ASSETS
            
             
   
June 30, 2009
    
June 30, 2008
  
Current assets:
            
Cash
   $ 2,805     $ 45,509  
Prepaid expenses and other assets
     34,276       45,934  
Total current assets
     37,081       91,443  
                 
Note receivable from related party
     16,691       15,132  
Property and equipment, net
     2,299       7,418  
Intangible assets, net
     230,653       245,081  
Long term prepaids and deposits
     72,500       104,800  
Total assets
   $ 359,224     $ 463,874  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                
                 
Current liabilities:
                
Account payable
   $ 595,902     $ 573,585  
Accrued expenses
     2,306,130       1,365,143  
Series B convertible preferred stock liability
     709,200       62,526  
Series B convertible preferred beneficial conversion feature
     75,264       61,264  
Series B dividends payable
     142,861       55,633  
Notes payable
     145,000       -  
Notes payable - related parties
     886,125       476,000  
Due to related parties
     257,218       206,366  
Total current liabilities
     5,117,700       2,800,517  
                 
Commitments and contingencies (Notes 3 and 13)
                
                 
Stockholders' equity (deficit):
                
Series B convertible preferred stock, par value $0.001, 10,000,000
                
shares authorized, 210 shares issued and outstanding at June 30, 2009
                
and 2008,  (liquidation preference: $2,100,000 at June 30, 2009
                
and 2008)
     1,087,579       1,087,579  
                 
Common stock, par value $0.001, 190,000,000 shares authorized,
                
73,494,327 and 69,669,535 shares issued and outstanding at
                
June 30, 2009 and 2008, respectively
     73,495       69,670  
                 
Subscribed stock
     79,961       424,536  
Additional paid-in capital
     5,873,882       5,698,358  
Accumulated other comprehensive income
     20,120       20,120  
Deficit accumulated during the development stage
     (11,893,513 )     (9,636,906 )
Total stockholders' equity (deficit)
     (4,758,476 )     (2,336,643 )
Total liabilities and stockholders' equity (deficit)
   $ 359,224     $ 463,874  
                 

See accompanying notes to financial statements
 
 
 
45
 

 
 
URIGEN PHARMACEUTICALS, INC.

(a development stage company)
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
____________
 
               
Period from
  
               
July 18, 2005
  
   
Year ended June 30,
    
(date of inception)
  
   
2009
    
2008
    
to June 30, 2009
  
Operating expenses:
                  
                   
Research and development
   $ 195,139     $ 684,304     $ 2,441,478  
General and administrative
     1,532,620       2,761,535       7,108,247  
Sales and marketing
     77,010       264,269       648,346  
Total operating expenses
     1,804,769       3,710,108       10,198,071  
                         
Loss from operations
     (1,804,769 )     (3,710,108 )     (10,198,071 )
                         
Other income and expense, net:
                        
Interest income
     1,836       18,094       42,281  
Interest expense
     (189,892 )     (2,235,286 )     (2,526,577 )
Other income (expense), net
     (263,782 )     1,082,842       788,854  
Total other income (expense), net
     (451,838 )     (1,134,350 )     (1,695,442 )
                         
Net loss
   $ (2,256,607 )   $ (4,844,458 )   $ (11,893,513 )
Deemed dividend related to                        
incremental beneficial conversion                        
feature on preferred stock      188,000        -        188,000  
                         
Accretion of dividend on preferred stock      87,228        -        87,228  
                         
Net loss attributable to common stockholders    $   (2,531,835 )    $   (4,844,458 )    $   (12,168,741 ) 
                         
Basic and diluted net loss per share
   $ (0.03 )   $ (0.07 )        
Shares used in computing basic and diluted net loss per share
     72,468,932       69,860,358          
                         
                         

See accompanying notes to financial statements


 
46
 
 
 
URIGEN PHARMACEUTICALS, INC.
 
(a development stage company)
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

for the period from July 18, 2005 (date of inception) to June 30, 2009
 
 
  
         
 
        
 
                      
 
 
      
 
 
  
Urigen N.A., Inc.
  
Urigen
Pharmaceuticals,
 
Urigen N.A., Inc.
  Urigen
  
 
      
Accumulated
Deficit
accum
  
Total
  
 
Urigen N.A., Inc.
  
Series A
  
Inc.
Urigen N.A., Inc.
Series B
Pharmaceuticals,
  
 
      
other
ulated
  
stock-
  
 
Series A
Preferred Stock
  
Preferred Stock
Subscribed
  
Series B
Preferred Stock
Series B
Preferred Stock
Preferred Stock
Subscribed
Inc.
Common Stock
  
Urigen N.A., Inc.
Common Stock
  
Common Stock
Subscribed
Additional
Paid-In
compre
hensive
during
development
  
holders'
equity
  
 
Shares
  
Amount
  
Shares
    
Amount
  
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
  
Shares
    
Amount
  
Shares
Amount
Capital
income
stage
  
(deficit)
  
Common stock issued at $0.22169 per share upon
                                                              
  incorporation in July 2005*
                                       5     $ 1               $ 1  
Preferred stock subscribed at
                                                                    
  $0.19546 per share in July 2005*
           225,543     $ 44,085                                                 44,085  
Preferred stock subscribed at
                                                                        
  $0.19453 per share in August 2005*
           338,315       65,813                                                 65,813  
Preferred stock subscribed at a range of
                                                                        
  $0.19453 to $0.19497 per share in September 2005*
           676,629       131,725                                                 131,725  
Preferred stock subscribed at a range of
                                                                        
  $0.19200 to $0.19546 per share in October 2005*
           696,603       135,054                                                 135,054  
Preferred stock subscribed at
                                                                        
  $0.19457 per share in November 2005*
           530,974       103,314                                                 103,314  
Common stock issued at $0.00002 per share
                                                                        
  to Urigen, Inc. shareholders in December 2005*
                                           27,065,169       559                 559  
Preferred stock subscribed at a range of
                                                                        
  $0.19238 to $0.20187 per share in December 2005*
           593,233       116,709                                                 116,709  
Common stock issued at $0.00002 per share
                                                                        
  to Urigen, Inc. shareholders in January 2006*
                                           3,947,004       88                 88  
Common stock issued at $0.19316 per share
                                                                        
  in lieu of rent payment in January 2006*
                                           9,473       1,830                 1,830  
Preferred stock subscribed at a range of
                                                                        
  $0.12505 to $0.19801 per share in January 2006*
           4,293,448       822,017                                                 822,017  
Preferred stock subscribed at a range of
                                                                        
  $0.19072 to $0.19305 per share in February 2006*
           925,146       178,286                                                 178,286  
Common stock issued at $0.18994 per share
                                                                        
  in lieu of rent payment in March 2006*
                                           9,473       1,798                 1,798  
Preferred stock subscribed at a range of
                                                                        
  $0.18994 to $0.19564 per share in March 2006*
           583,827       111,640                                                 111,640  
Common stock issued at $0.18972 per share
                                                                        
  pursuant to an exercise of a stock option in
                                                                        
 April 2006*
                                           45,109       8,558                 8,558  
Preferred stock subscribed at a range of
                                                                        
  $0.19070 to $0.19546 per share in April 2006*
           331,197       63,661                                                 63,661  
Common stock issued at $0.05542 per share
                                                                        
  pursuant to a consulting agreement net of
                                                                        
  issuance cost of $2,926 in May 2006*
                                           1,894,562       102,074                 102,074  
Common stock issued at $0.05542 per share
                                                                        
  pursuant to a licensing agreement in May 2006*
                                           1,623,910       90,000                 90,000  
Preferred stock subscribed at $0.19990
                                                                        
  per share in May 2006*
           132,746       26,535                                                 26,535  
Common stock issued at $0.19799 per share
                                                                        
  in lieu of rent payment in June 2006*
                                           9,473       1,875                 1,875  
Preferred stock subscribed at a range of
                                                                        
  $0.19799 to $0.20063 per share in June 2006*
           499,023       99,430                                                 99,430  
Stock issuance costs in June 2006
                   (5,977 )                                               (5,977 )
Series A Preferred stock issued in June 2006*
  9,826,684
   $1,892,292     (9,826,684 )     (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
  9,826,684
   $1,892,292     -       -  
              -
              -
              -
              -
              -
              -
              -
 $-     34,604,178     $ 206,783  
              -
              -
              -
 $20,088 $(1,540,412)   $ 578,751  
                                                                         
 
 
*reflects a 2-for-1 stock split and a 2.2554-for-1 merger exchange

See accompanying notes to financial statements



 
47
 
 
 
URIGEN PHARMACEUTICALS, INC.
(a development stage company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT), continued
 
for the period from July 18, 2005 (date of inception) to June 30, 2009

   
Urigen N.A., Inc.
Series A
    
Urigen N.A., Inc.
Series A
Preferred Stock
    
Urigen
Pharmaceuticals, Inc.
Series B
    
Urigen N.A.,
Inc.
Series B
    
Urigen N.A., Inc.
Series B
Preferred Stock
    
 
    
Urigen
Pharmaceuticals, Inc.
    
Urigen N.A.,
Inc.
Common Stock
    
Additi-onal
    
Accumulated
other
    
Deficit
accumulated
during
    
Total
stock-
  
   
Preferred Stock
    
Subscribed
    
Preferred Stock
    
Preferred Stock
    
Subscribed
  
Common Stock
    
Common Stock
    
Subscribed
    
Paid-In
    
compre-hensive
    
develo-pment
    
holders
'equity
  
   
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
income
    
stage
    
 (deficit)
  
Balances at June 30, 2006
     9,826,684     $ 1,892,292       -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       34,604,178     $ 206,783       -     $ -     $ -     $ 20,088     $ (1,540,412 )   $ 578,751  
Common stock issued at $0.05542 per share pursuant
                                                                                                                                                                
      to a consulting agreement in August 2006*
                                                                                                     112,772       6,250                                               6,250  
Common stock subscribed at $0.19956 per share
                                                                                                                                                                
      pursuant to a stock option plan in August 2006*
                                                                                                                     33,831       6,752                               6,752  
Common stock issued at a range of $0.19666 to
                                                                                                                                                                
      $0.19801 per share in lieu of consulting fees
                                                                                                                                                                
 in September 2006*
                                                                                                     112,072       22,102                                               22,102  
Common stock issued at $0.19956 per share
                                                                                                                                                                
      pursuant to a stock option plan in September 2006*
                                                                                                     22,554       4,501       (22,554 )     (4,501 )                             -  
Common stock issued at $0.05542 per share pursuant
                                                                                                                                                                
 to a consulting agreement in September 2006*
                                                                                                     112,772       6,250                                               6,250  
Common stock issued at $0.19899 per share in lieu of
                                                                                                                                                                
 rent payment in September 2006*
                                                                                                     9,473       1,885                                               1,885  
Correction of previously issued Series A preferred
                                                                                                                                                                
 stock*
     4,601       -                                                                                                                                               -  
Reclassification of common stock to additional
                                                                                                                                                                
 paid-in capital upon re-domestication
                                                                                                     -       (246,919 )                     246,919                       -  
Series B preferred stock subscribed at $0.22169 per share
                                                                                                                                                                
 in October 2006**
                                                                     518,749       115,000                                                                               115,000  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
 in October 2006**
                                                     518,749       115,000       (518,749 )     (115,000 )                                                                             -  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
 pursuant to an exchange agreement in October 2006**
                                                     11,277       2,500                                                                                               2,500  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
 pursuant to a vendor agreement in October 2006**
                                                     45,109       10,000                                                                                               10,000  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
      pursuant to a promissory note in October 2006**
                                                     11,277       2,500                                                                                               2,500  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
 pursuant to a vendor agreement in November 2006**
                                                     45,109       10,000                                                                                               10,000  
Series B preferred stock subscribed at $0.22169 per share
                                                                                                                                                                
 in November 2006**
                                                                     1,127,716       250,000                                                                               250,000  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
      in November 2006**
                                                     1,127,716       250,000       (1,127,716 )     (250,000 )                                                                             -  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
 pursuant to a vendor agreement in December 2006**
                                                     45,109       10,000                                                                                               10,000  
Series B preferred stock subscribed at $0.22169 per share
                                                                                                                                                                
   to officers in lieu of cash payroll in December 2006**
                                                                     840,825       186,400                                                                               186,400  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
      to an officer in lieu of cash payroll in January 2007**
                                                     338,315       75,000       (338,315 )     (75,000 )                                                                             -  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
 pursuant to a vendor agreement in January 2007**
                                                     45,109       10,000                                                                                               10,000  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
      pursuant to a consulting agreement in January 2007**
                                                     216,521       48,000                                                                                               48,000  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
      pursuant to a promissory note in January 2007**
                                                     5,639       1,250                                                                                               1,250  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
      to an officer in lieu of cash payroll in January 2007**
                                                     112,771       25,000                                                                                               25,000  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
      in January 2007**
                                                     225,543       50,000                                                                                               50,000  
                                                                                                                                                                 
                                                                                                                                                                 
 
* reflects a two-for-one stock split and a 2.2554:1 merger exchange
** reflects a 11.277:1 merger exchange

See accompanying notes to financial statements
 
 
48
 
 
 
URIGEN PHARMACEUTICALS, INC.
 
(a development stage company)
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT), continued
 
for the period from July 18, 2005 (date of inception) to June 30, 2009
 
   
 
    
Urigen N.A., Inc.
  
Urigen
Pharmaceuticals,		  
Urigen N.A., Inc.
    
Urigen N.A., Inc.
  
Urigen
  
 
            
Accum-
ulated
Deficit
accum-ulated
    
Total
  
   
Urigen N.A., Inc.
Series A
  
Series A
Preferred Stock
 Inc.
Series B
  
Series B
    
Series B
Preferred Stock
  
Pharmaceuticals, Inc.
  
Urigen N.A., Inc.
  
Common Stock
  
Additional
  
other
compreh-
during
develo-
  
stock-holders'
  
   
Preferred Stock
  
Subscribed
Preferred Stock
  
Preferred Stock
    
Subscribed
  
Common Stock
Common Stock
  
Subscribed
  
Paid-In
  
ensive
pment
  
equity
 
   
Shares
    
Amount
  
Shares
Amount
Shares
Amount
  
Shares
    
Amount
    
Shares
    
Amount
  
Shares
Amount
  
Shares
    
Amount
  
Shares
Amount
  
Capital
  
income
stage
  
(deficit)
  
Series B preferred stock issued at $0.22169 per share
                                                                                
 pursuant to a vendor agreement in February 2007**
                         45,109     $ 10,000                                               $ 10,000  
Series B preferred stock issued at $0.22169 per share
                                                                                      
      to an officer in lieu of cash payroll in February 2007**
                         112,771       25,000                                                 25,000  
Series B preferred stock issued at $0.22169 per share
                                                                                      
 pursuant to a vendor agreement in March 2007**
                         45,109       10,000                                                 10,000  
Series B preferred stock issued at $0.22169 per share
                                                                                      
      to an officer in lieu of cash payroll in March 2007**
                         112,771       25,000                                                 25,000  
Series B preferred stock issued at $0.22169 per share
                                                                                      
 pursuant to a vendor agreement in April 2007**
                         45,109       10,000                                                 10,000  
Series B preferred stock issued at $0.22169 per share
                                                                                      
      to an officer in lieu of cash payroll in April 2007**
                         112,771       25,000                                                 25,000  
Series B preferred stock issued at $0.22169 per share
                                                                                      
 pursuant to a vendor agreement in May 2007**
                         45,109       10,000                                                 10,000  
Series B preferred stock issued at $0.22169 per share
                                                                                      
      to officers in lieu of cash payroll in May 2007**
                         1,982,828       439,567       (502,510 )   $ (111,400 )                                   328,167  
Series B preferred stock issued at $0.22169 per share
                                                                                          
 pursuant to a vendor agreement in May 2007**
                         5,639       1,250                                                     1,250  
Series B preferred stock issued at $0.22169 per share
                                                                                          
      to a consultant in lieu of cash in May 2007**
                         287,297       63,690                                                     63,690  
Series B preferred stock issued at $0.22169 per share
                                                                                          
      pursuant to a consulting agreement in May 2007**
                         36,087       8,000                                                     8,000  
Series B preferred stock issued at $0.22169 per share
                                                                                          
      to an officer in lieu of cash payroll in May 2007**
                         112,771       25,000                                                     25,000  
Series B preferred stock issued at $0.22169 per share
                                                                                          
      pursuant to consulting agreements in May 2007**
                         180,434       40,000                                                     40,000  
Series B preferred stock issued at $0.22169 per share
                                                                                          
 pursuant to a vendor agreement in June 2007**
                         45,109       10,000                                                     10,000  
Series B preferred stock issued at $0.22169 per share
                                                                                          
      to an officer in lieu of cash payroll in June 2007**
                         112,771       25,000                                                     25,000  
Series B preferred stock subscribed at $0.22169 per share
                                                                                          
      pursuant to a consulting agreement in June 2007**
                                         36,087       8,000                                     8,000  
Series B preferred stock subscribed at $0.22169 per share
                                                                                          
      to a consultant in lieu of cash in June 2007**
                                         35,917       7,962                                     7,962  
Series B preferred stock subscribed at $0.22169 per share
                                                                                          
      to officers in lieu of cash payroll in June 2007**
                                         274,531       60,860                                     60,860  
Reclassification of Series A preferred stock to
                                                                                          
      common pursuant to a stockholder vote in
                                                                                          
      June 2007**
     (9,831,285 )     (1,892,292 )                                                 9,831,285       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
     -     $ -  
              -
 $-
              -
 $-     6,029,929     $ 1,336,757       346,535     $ 76,822  
              -
 $-     44,805,106     $ 896  
11,277
 $2,251   $ 2,139,167   $19,800 $(4,792,448)   $ (1,216,755 )
                                                                                                     
 
* reflects a two-for-one stock split and a 2.2554:1 merger exchange
** reflects a 11.277:1 merger exchange
 

See accompanying notes to financial statements


 
49
 
 
URIGEN PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT), continued

for the period from July 18, 2005 (date of inception) to June 30, 2009
 
 
   
Urigen N.A., Inc.
Series A
    
Urigen N.A., Inc.
Series A
Preferred Stock
    
Urigen
Pharmaceuticals Inc.
Series B
    
Urigen N.A., Inc.
Series B
    
Urigen N.A., Inc.
Series B
Preferred Stock
    
Urigen
Pharmaceuticals Inc.
    
Urigen N.A., Inc.
    
Common Stock
    
Addi-tional
    
Accum-
ulated
other
compre-hensive
    
Deficit
accum-
ulated
during
develo-
    
Total
stock-
holders'
  
   
Preferred Stock
    
Subscribed
    
Preferred Stock
    
Preferred Stock
    
Subscribed
    
Common Stock
    
Common Stock
    
Subscribed
    
Paid-In
    
 
    
pment
    
equity
 
   
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
income
    
stage
    
(deficit)
  
Balances at June 30, 2007
     -     $ -       -     $ -       -     $ -       6,029,929     $ 1,336,757       346,535     $ 76,822       -     $ -       44,805,106     $ 896       11,277     $ 2,251     $ 2,139,167     $ 19,800     $ (4,792,448 )   $ (1,216,755 )
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
 pursuant to a vendor agreement in July 2007**
                                                     45,109       10,000                                                                                               10,000  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
      pursuant to a consulting agreement in July 2007**
                                                     36,087       8,000       (36,087 )     (8,000 )                                                                             0  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
      to officers in lieu of cash payroll in July 2007**
                                                     274,531       60,860       (274,531 )     (60,860 )                                                                             0  
Series B preferred stock issued at $0.22169 per share
                                                                                                                                                                
      to a consultant in lieu of cash in July 2007**
                                                     35,917       7,962       (35,917 )     (7,962 )                                                                             0  
Write-off common stock subscribed in July 2007
                                                                                                                     (11,277 )     (2,251 )                             (2,251 )
To reclassify Urigen N.A., Inc. Series B Preferred
                                                                                                                                                                
      stock to Urigen Pharmaceuticals, Inc. pursuant to
                                                                                                                                                                
      merger in July 2007
                                                     (6,421,573 )     (1,423,579 )                     6,421,573       6,422                                       1,417,157                       0  
To reclassify Urigen N.A., Inc. Common stock to
                                                                                                                                                                
      Urigen Pharmaceuticals, Inc. pursuant to
                                                                                                                                                                
       merger in July 2007
                                                                                     44,805,106       44,805       (44,805,106 )     (896 )                     (43,909 )                     0  
Valentis common shares outstanding at time of merger, July 2007
                                                                                     17,062,856       17,063                                       41,584                       58,647  
Issuance of Series B preferred stock with warrants
 in July 2007 (Note 10)
                                                                                                                               1,127,557                       1,127,557  
Common stock issued at $0.09875 per share
                                                                                                                                                                
      pursuant to license agreement in November 2007
                                                                                     1,000,000       1,000                                       98,750                       99,750  
Reclassification
of Series B
 preferred
stock upon
effective
 registration
of a portion of
shares issued
at $0.10500
 per underlying
share in
December 2007
 (Note 10)
     210       1,087,579                                                                                       911,179                       1,998,758  
Common stock subscribed at a range of
                                                                                                                                                                
       $0.09975 to $0.27550 per share pursuant to
                                                                                                                                                                
       vendor agreements, recognized in December 2007
                                                                                                                     540,815       71,320                               71,320  
Common stock subscribed at a range
                                                                                                                                                                
       of $0.09975 to $0.27550 per share pursuant to
                                                                                                                                                                
       employee agreements, recognized in December 2007
                                                                                                                     63,150       6,299                               6,299  
Common stock subscribed at $0.17100
                                                                                                                                                                
       per share pursuant to consultant agreement
                                                                                                                                                                
       in January 2008
                                                                                                                     20,000       3,420                               3,420  
Common stock and warrants subscribed
                                                                                                                                                                
        at $0.20 per share pursuant to cash
                                                                                                                                                                
        investment in January 2008
                                                                                                                     500,000       100,000                               100,000  
Common stock subscribed at
                                                                                                                                                                
        $0.10450 per share pursuant to a vendor
                                                                                                                                                                
        agreement in January 2008
                                                                                                                     380,000       39,710                               39,710  
Common stock subscribed at $0.1805
                                                                                                                                                                
      per share pursuant to Directors' Compensation
                                                                                                                                                                
      agreement in January 2008
                                                                                                                     58,125       10,491                               10,491  
                                                                                                                                                                 
                                                                                                                                                                 

* reflects a two-for-one stock split and a 2.2554:1 merger exchange

** reflects a 11.277:1 merger exchange
See accompanying notes to financial statements


 
50
 
 
 
URIGEN PHARMACEUTICALS, INC.

(a development stage company)
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT), continued
for the period from July 18, 2005 (date of inception) to June 30, 2008
 

                                                                                                                         
               
 
                                  
 
                                        
 
        
   
 
    
 
     Urigen    
 
    
 
          
 
    
 
                      
 
    
Deficit
        
   
Urigen N.A., Inc.
Series A
    
Urigen N.A., Inc.
Series A
Preferred Stock
    
Pharmaceuticals Inc.
Series B
    
Urigen N.A., Inc.
Series B
    
Urigen N.A., Inc.
Series B
Preferred Stock
    
Urigen
Pharmaceuticals Inc.
    
Urigen N.A., Inc.
Common Stock
    
Common Stock
    
Addi-tional
    
Accum-ulated
other
    
accum-ulated
during
    
Total
  
   
Preferred Stock
    
Subscribed
    
Preferred Stock
    
Preferred Stock
    
Subscribed
      
Common Stock
                
Subscribed
          
Paid-In
    
compre-
hensive
    
develo-
pment
    
stock-holders'
  
   
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
income
    
stage
    
equity (deficit)
  
Common stock subscribed at $0.17 per share pursuant to a cash
                                                                                                                        
investments in April, 2008.
                                                                                         726,470     $ 123,500                       $ 123,500  
Common stock subscribed at $0.17 per share pursuant to a
                                                                                                                              
vendor agreement in April 2008
                                                                                         147,059       25,000                         25,000  
Common stock subscribed at $0.17 per share pursuant to a cash
                                                                                                                              
investments in May 2008.
                                                                                         555,883       94,500                         94,500  
Common stock subscribed at $0.12 per share pursuant to a
                                                                                                                              
vendor agreement in May 2008.
                                                                                         60,000       7,200                         7,200  
Adjustment of common stock subscribed at a range of $0.114 to
                                                                                                                              
$0.2755 per share due to a settlement agreement with a vendor
                                                                                         (276,815 )     (44,873 )                       (44,873 )
Subscribed common stock issued in June, 2008 at subscribed fair value
                                                                                                                              
of $0.10450 per share and current fair value of $0.0855 per share.
                                                                 380,000       380                   (380,000 )     (39,710 )     32,110                   (7,220 )
Revaluation of unearned vendor warrants to fair value
                                                                                                                                    
in June 2008.
                                                                                                             2,447                   2,447  
Common stock subscribed at $0.08551 per share pursuant to
                                                                                                                                    
Directors' compensation agreement in June 2008.
                                                                                             58,125       4,970                           4,970  
Stock based compensation expense on Valentis options
                                                                                                                                    
recognized in fiscal 2008.
                                                                                                     2,247       27,949                   30,196  
Stock based compensation expense on Restricted Stock agreements
                                                                                                                                    
recognized in fiscal 2008
                                                                                             1,300,000       20,462                           20,462  
Imputed Dividends - Series B Preferred recognized in fiscal 2008
                                                                                                             (55,633 )                 (55,633 )
Foreign currency adjustment
                                                                                                                   $ 320             320  
Net loss
                                                                                                                           $ (4,844,458 )     (4,844,458 )
Total comprehensive loss
                                                                                                                                     (4,844,138 )
Balances at June 30, 2008
     -     $ -       -     $ -       210     $ 1,087,579       -     $ -       -     $ -       69,669,535     $ 69,670       -     $ -       3,752,812     $ 424,536     $ 5,698,358     $ 20,120     $ (9,636,906 )   $ (2,336,643 )
                                                                                                                                                                 
                                                                                                                                                                 
                                                                                                                                                                 
Common stock subscribed to reflect additional shares due to
                                                                                                                                                                
modification of purchase agreement from $0.20 to $0.17 per share
                                                                                                                     88,230       0                               0  
Common stock subscribed at $0.1045 per share pursuant to
                                                                                                                                                                
Directors' compensation agreement in September 2008
                                                                                                                     58,125       6,074                               6,074  
Subscribed common stock issued in November, 2008 at a subscribed
                                                                                                                                                                
average value of  $0.11178 and a current fair value of
                                                                                                                                                                
$0.050 per share
                                                                                     3,664,792       3,665                       (3,664,792 )     (409,666 )     406,001                       0  
Common stock issued at a value of $0.076 per share pursuant to a
                                                                                                                                                                
vendor agreement in November, 2008.
                                                                                     100,000       100                                       7,500                       7,600  
Common stock subscribed at $0.0190 per share pursuant to
                                                                                                                                                                
Directors' compensation agreement in December 2008
                                                                                                                     58,125       1,104                               1,104  
Reclassification of equity to liability due to a change in conversion
                                                                                                                                                                
price and shares issuable upon conversion of Series B
                                                                                                                                                                
preferred stock.
                                                                                                                                     (700,000 )                     (700,000 )
Adjust mark to market calculation for additional unregistered shares
                                                                                                                                                                
issuable upon coversion of Series B preferred stock.
                                                                                                                                     420,000                       420,000  
Discount on note payable for beneficial conversion feature
                                                                                                                                     50,000                       50,000  
Reduction of common stock subscribed for Director who should
                                                                                                                                                                
not have been covered by agreement
                                                                                                                     (46,500 )     (4,527 )                             (4,527 )
Subscribed common stock issued in January, 2009 at a subscribed
                                                                                                                                                                
value of $0.12 and a current fair value of $0.05 per share
                                                                                     60,000       60                       (60,000 )     (7,200 )     7,140                       0  
Common stock subscribed at $0.14 per share pursuant to a
                                                                                                                                                                
vendor agreement in February 2009.
                                                                                                                     200,000       28,000                               28,000  
Common stock subscribed at $0.10 per share pursuant to a
                                                                                                                                                                
vendor agreement in March 2009.
                                                                                                                     250,000       25,000                               25,000  
Common stock subscribed at $0.10 per share pursuant to a
                                                                                                                                                                
vendor agreement in March 2009.
                                                                                                                     75,000       7,500                               7,500  
Common stock subscribed at $0.09 per share pursuant to a
                                                                                                                                                                
vendor agreement in April 2009.
                                                                                                                     15,000       1,350                               1,350  
Stock based compensation expense on Valentis options
                                                                                                                                                                
recognized in fiscal 2009.
                                                                                                                                     (40,446 )                     (40,446 )
Stock based compensation expense on Restricted Stock agreements
                                                                                                                                                                
recognized in fiscal 2009.
                                                                                                                             7,790       112,557                       120,347  
Imputed Dividends - Series B Preferred recognized in fiscal 2009
                                                                                                                                     (87,228 )                     (87,228 )
Incremental beneficial conversion feature related to preferred stock                                                                                                                                      188,000                          
Deemed dividend related to preferred stock                                                                                                                                       (188,000 )                         
Net loss
                                                                                                                                                     (2,256,607 )     (2,256,607 )
Total comprehensive loss
                                                                                                                                                             (2,256,607 )
Balances at June 30, 2009
     -       -       -       -       210     $ 1,087,579       -       -       -       -       73,494,327     $ 73,495       -       -       726,000     $ 79,961     $ 5,873,882     $ 20,120     $ (11,893,513 )   $ (4,758,476 )
                                                                                                                                                                 

* reflects a two-for-one stock split and a 2.2554:1 merger exchange
** reflects a 11.277:1 merger exchange



See accompanying notes to financial statements


 
51
 

URIGEN PHARMACEUTICALS, INC.
 
(a development stage company)
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
______________

               
Cumulative period
  
               
from July 18, 2005
  
   
Year ended June 30,
    
(date of inception) to
  
   
2009
    
2008
    
June 30, 2009
  
Cash flows from operating activities:
                  
Net loss
   $ (2,256,607 )   $ (4,844,458 )   $ (11,893,513 )
Adjustments to reconcile net loss to net cash used in operating activities:
                        
Depreciation
     4,057       5,858       12,170  
Amortization of intangible assets
     14,428       14,428       47,984  
Non-cash expenses: compensation, interest, rent, and other
     240,128       234,560       1,756,798  
Preferred Series B discount and imputed interest
     14,000       2,142,270       2,156,270  
Change in fair value of Series B convertible preferred stock liability
     366,674       (949,895 )     (583,221 )
Changes in operating assets and liabilities:
                        
Prepaid expenses and other assets
     43,958       88,100       114,830  
Note receivable from related party
     (1,559 )     (15,132 )     (16,691 )
Accounts payable
     22,317       (119,631 )     595,903  
Accrued expenses
     940,987       771,087       2,097,415  
Due to related parties
     50,852       (19,702 )     257,218  
Net cash used in operating activities
     (560,765 )     (2,692,515 )     (5,454,837 )
                         
Cash flows from investing activities:
                        
Purchases of property and equipment
     (270 )     (4,255 )     (11,306 )
Proceeds from sale of property and equipment
     1,331       -       1,331  
Asset-based purchase, net of cash acquired, from Urigen, Inc.
     -       -       470,000  
Net cash provided by (used in) investing activities
     1,061       (4,255 )     460,025  
                         
Cash flows from financing activities:
                        
    Cash acquired in consummation of reverse merger, net
     -       222,351       222,351  
Proceeds from issuance of notes payable
     20,000               20,000  
Proceeds from issuance of notes payable - related parties
     497,000       -       797,000  
Payment of receivables from stockholders
     -       -       45,724  
Proceeds from stock and warrant subscriptions, and exercise of stock options
     -       318,000       333,310  
Proceeds from issuance of Urigen N.A. Series B convertible preferred stock,
                        
net of issuance costs
     -       -       415,000  
Proceeds from issuance of Urigen N.A. Series A preferred stock,
                        
net of issuance costs
     -       -       1,002,135  
Proceeds from issuance of Series B convertible preferred stock
     -       2,100,000       2,100,000  
Net cash provided by financing activities
     517,000       2,640,351       4,935,520  
Effect of exchange rate changes on cash
      -       320       62,097  
Net decrease in cash
     (42,704 )     (56,099 )     2,805  
Cash, beginning of period
     45,509       101,608       -  
Cash, end of period
   $ 2,805     $ 45,509     $ 2,805  
                         
Non-cash investing and financing activities:
                        
Intangible assets acquired through issuance of common stock
   $   -     $ -     $ 90,560  
Non-cash portion related to asset-based purchase from Urigen, Inc.:
                        
Assumption of notes payable subsequently converted to preferred stock
   $   -     $ -     $ 255,000  
Amount due from stockholders for issuance of preferred stock
   $   -     $ -     $ 45,724  
Reclassification of Preferred stock liability to equity
   $   -     $ 1,087,579     $ 1,087,579  
Reclassification of equity to preferred stock liability
   $ 280,000     $ -     $ 280,000  
Reclassification of Preferred beneficial conversion feature
                        
from liability to equity
   $   -     $ 911,179     $ 911,179  
Valentis net equity received in connection with reverse merger
   $   -     $ 58,647     $ 58,647  
                         
Supplemental Cash Flow Information:
                        
Cash paid for interest
   $   -     $ 12,088     $ 43,673  
                         
 
                        
 
See accompanying notes to financial statements
 
 
 
 
52
 
 




URIGEN PHARMACEUTICALS, INC.

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a development stage company)
1.    Nature of Operations and Business Risks

Urigen Pharmaceuticals, Inc. (“the Company”), formerly Valentis, Inc. (“Valentis”) a Delaware incorporated company, is a specialty pharmaceutical company dedicated to the development and commercialization of therapeutic products for urological disorders. The pipeline includes URG101, for the treatment of Painful Bladder Syndrome (PBS) which has completed a Phase II double blinded, placebo controlled, multi-center trial achieving statistically significant results on all end points; and URG301, targeting urethritis and nocturia.

Urigen N.A., Inc. 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.  Management and the Board of Directors of the Company concluded that continuation and re-incorporation of the Company as a Delaware company was 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 would receive 2 shares for every outstanding share of common and preferred stock.

On October 5, 2006, the Company entered into an Agreement and Plan of Merger, as subsequently amended (the “Merger”) with Urigen N.A., Inc., a Delaware corporation (“Urigen N.A.”), and Valentis Holdings, Inc., our newly formed wholly-owned subsidiary (“Valentis Holdings”). Pursuant to the Merger Agreement, on July 13, 2007, Valentis Holdings was merged with and into Urigen N.A. with Urigen N.A., Inc. surviving as our wholly-owned subsidiary. In connection with the Merger, each Urigen N.A. stockholder received, in exchange for each share of Urigen N.A. common stock held by such stockholder immediately prior to the closing of the Merger, 2.2554 shares of our common stock. At the effective time of the Merger, each share of Urigen N.A. Series B preferred stock was exchanged for 11.277 shares of our common stock. An aggregate of 51,226,679 shares of our common stock were issued to the Urigen N.A. stockholders.  Upon completion of the Merger, the Company changed its name from Valentis, Inc. to Urigen Pharmaceuticals, Inc.

Background to the Merger

On July 11, 2006, Valentis issued a press release announcing the negative results of the Phase IIb clinical trial for VLTS 934. The press release noted that Valentis had no plans for further development of its products and was assessing strategic alternatives, including the sale or merger of Valentis, the sale of certain of Valentis’ assets or other alternatives.   In July and August 2006, Valentis communicated with potential reverse merger candidates regarding its review process. On July 22, 2006, William J. Garner M.D., Urigen N.A.’s president and chief executive officer, left a message for Dr. Benjamin F. McGraw III, Valentis’ president and chief executive officer, to discuss a possible merger of Valentis and Urigen N.A. resulting in the obtaining of a public listing by Urigen N.A.  On July 24, 2006, Dr. Garner spoke with Dr. McGraw about a possible merger of the two companies.  Valentis chose to pursue a reverse merger with Urigen N.A. because, among other things, Urigen N.A. had a product that had completed a successful Phase IIa trial and, at the time, was close to completion of a Phase IIb trial, and Urigen N.A. had a modest valuation that was in an acceptable range to Valentis.
 
Reverse Merger

Urigen N.A. security holders owned, immediately after the closing of the Merger, approximately two-thirds of the combined company on a fully-diluted basis. Further, Urigen N.A. directors constituted a majority of the combined company's board of directors and all members of the executive management of the combined company were from Urigen N.A. Therefore, Urigen N.A. was deemed to be the acquiring company for accounting purposes and the Merger transaction was accounted for as a reverse merger and a recapitalization. The financial statements of the combined entity after the Merger reflect the historical results of Urigen N.A. prior to the Merger and do not include the historical financial results of Valentis prior to the completion of the Merger.  Stockholders' equity (deficit) and net loss per share of the combined entity after the Merger were retroactively restated to reflect the number of shares of common stock received by Urigen N.A. security holders in the Merger, after giving effect to the difference between the par values of the capital stock of Urigen N.A. and Valentis, with the offset to additional paid-in capital. The consolidated financial statements have been prepared to give effect to the Merger of Urigen N.A. and Valentis as a reverse acquisition of assets and a recapitalization in accordance with accounting principles generally accepted in the United States. For accounting purposes, Urigen N.A. was considered to be acquiring Valentis in the Merger as Valentis did not meet the definition of a business in accordance with Statement of Financial Accounting Standards, SFAS No. 141, Business Combinations ("SFAS No. 141"), and Emerging Issue Task Force 98-3 ("EITF 98-3"), Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business, because Valentis had no material assets or liabilities at the time of finalizing the Merger.  Consequently, all of the assets and liabilities of Valentis have been reflected in the financial statements at their respective fair values and no goodwill or other intangibles were recorded as part of acquisition accounting and the cost of the Merger was measured at net assets acquired.
 
 
 
53
 
 

 
Accounting for the Merger

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the Merger:
 
Cash
  
$
222,351
  
Prepaid legal
    
18,170
  
Other current assets
    
3,265
  
Property and equipment
    
4,405
  
Prepaid insurance
    
195,171
  
Accrued liabilities
    
(208,715
)
Notes payable
    
(176,000
)
Net assets acquired
  
$
58,647
  
         
 
Other assets acquired in the Merger included the public OTCBB listing, various patent rights without significant fair value, and two storage units containing files, used office equipment, and furniture, also without significant fair value.   At the time of the Merger, Valentis’ accumulated comprehensive loss of ($244,904,871) was charged to Valentis’ additional paid-in capital.  From an accounting standpoint, Urigen N.A., a wholly-owned subsidiary of Urigen Pharmaceuticals Inc., remains as the operating entity.  Post-Merger financials contained in this report are presented consolidated, with inter-company transactions eliminated.  Pre-Merger financials are those of Urigen N.A.  Equity transactions in Urigen N.A. securities have been converted into an approximately equivalent number of shares of Urigen Pharmaceuticals Inc.

As of the date of this filing, the Company has realized an additional $400,000 in unexpected gross other revenue from three agreements for the licensing of Valentis technology.   The Company is not actively pursuing any development of Valentis technology obtained in the Merger and no material continuing revenues or expenses relating to the Merger are anticipated as of the date of this filing.
 
Nature of Operations and Risks

The Company is actively seeking corporate partnership, licensing or financing arrangements necessary to fund its development programs.

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.

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 will 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.


Basis of Presentation/Liquidity

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, 2009, the Company has accumulated net losses of $11,893,513 and negative cash flows from operations of $5,454,837 and has a negative working capital of $5,080,619. 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 financing, licensing agreements, 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.

Urigen N.A. 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. These shareholders also received a 2.2554-for-1 merger exchange at the time of the Merger.  The financial statements and notes to the financial statements have been adjusted retroactively to reflect a 2-for-1 stock split and 2.2554-for-1 merger exchange of the common stock and Series A preferred stock for common stock of the Company.
 
 
 
 
54
 

 
Urigen N.A. effected a 11.277-for-1 merger exchange of its Series B preferred stock at the time of the Merger.  The financial statements and notes to the financial statements have been adjusted retroactively to reflect an 11.277-for-1 merger exchange of the Series B preferred stock for common stock of the Company.

 Principles of Consolidation

The consolidated financial statements include the accounts of Urigen Pharmaceuticals, Inc. and its wholly-owned subsidiaries Urigen N.A. and PolyMASC Pharmaceuticals plc.  (PolyMASC is inactive).  All significant intercompany balances and transactions have been eliminated.

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 liabilities, and monthly average exchange rates for expenses. Intangible assets and equity were translated at historical exchange rates. Translation gains and losses were 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 periods presented.
 
Fair Value of Financial Instruments
 
The carrying amounts of certain of the Company’s financial instruments including cash, due from related party, prepaid expenses, notes payable, accounts payable, accrued expenses, and due to related parties approximate fair value due to their short maturities.
 
Company policy is to value its securities based on the average of the daily open and close price except where accounting standards or contractual terms specifically call for a different method.  Based on restricted stock valuation studies the company assumes a 5% valuation discount on unregistered Company equity instruments due to the restrictions on such instruments.
 
Cash Concentration
 
At June 30, 2009, the Company did not have bank balances at a single U.S. financial institution in excess of the Federal Deposit Insurance Corporation coverage limit of $250,000.
 
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.

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.
 
 
 
55
 
 
 
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.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.  We adopted the provisions of FIN 48 on July 1, 2007.   At the adoption date we did not have any unrecognized tax benefits and did not have any interest or penalties accrued. The cumulative effect of this change was not material.  Following implementation, the ongoing changes in measurement of uncertain tax positions will be reflected as a component of income tax expense.  Interest and penalties incurred associated with unresolved tax positions will continue to be included in other income (expense). 

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.
 
Clinical Trial Expenses

We believe the accrual for clinical trial expenses are a significant estimate used in the preparation of our consolidated financial statements. Our accruals for clinical trial expenses are based in part on estimates of services received and efforts expended pursuant to agreements established with clinical research organizations and clinical trial sites. We have a history of contracting with third parties that perform various clinical trial activities on our behalf in the ongoing development of our biopharmaceutical drugs. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flows. We determine our estimates through discussion with internal clinical personnel and outside service providers as to progress or stage of completion of trials or services and the agreed upon fee to be paid for such services. The objective of our clinical trial accrual policy is to reflect the appropriate trial expenses in our financial statements by matching period expenses with period services and efforts expended. In the event of early termination of a clinical trial, we accrue expenses associated with an estimate of the remaining, non-cancelable obligations associated with the winding down of the trial. Our estimates and assumptions for clinical trial expenses have been materially accurate in the past.

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) consist 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, 2009
    
Year Ended June 30, 2008
    
Period from
July 18, 2005 (date of inception) to June 30, 2009
  
                   
Net loss
   $ (2,256,607 )   $ (4,844,458 )   $ (11,893,513 )
Foreign currency translation adjustments, net of tax
     -       320       20,120  
Comprehensive loss
   $ (2,256,607 )   $ (4,844,138 )   $ (11,873,393 )
                         

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 instruments issued as they vest over a service period.
 
 
 
56
 

 
Stock-based compensation expense is recognized based on awards expected to vest, and forfeitures were estimated at the same rate (5%) used for stock-based compensation by the Merger partner, Valentis Inc.  SFAS 123R requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.  Fair value accounting details for stock based compensation is presented in tabular format in Note 14 of the consolidated financial statements included in this report.
 
Net Loss Per Share
 
Basic loss per share is computed by dividing loss applicable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, net of certain common shares outstanding that are held in escrow or subject to the Company’s right of repurchase. Diluted earnings per share include the effect of options and warrants, if dilutive. Diluted net loss per share has not been presented separately as, given our net loss position for all periods presented, the result would be anti-dilutive.
 
A reconciliation of shares used in the calculation of basic and diluted net loss per share follows (in thousands, except per share amounts):

   
2009
    
2008
  
Net loss
   $ (2,257 )   $ (4,844 )
Net loss attributable to common stockholders    $   (2,532 )    $   (4,844 ) 
Basic and Diluted:
                
Weighted-average shares of common stock used in computing net loss per share
     72,469       69,860  
Basic and diluted net loss per share
   $ (0.03 )   $ (0.07 )
                 

The following options, warrants, and convertible securities have been excluded from the calculation of diluted net loss per share because the effect of inclusion would be antidilutive:

· 
approximately 1.3 million shares of our common stock issuable upon the exercise of all of our outstanding options; and

· 
approximately 17.0 million shares of our common stock issuable upon the exercise of all of our outstanding warrants.
 
· 
210 shares of Series B preferred stock that currently is convertible into 21.0 million shares of common stock.
 
The common stock options and warrants subject to share vesting will be included in the calculation of loss per share at such time as the effect is no longer antidilutive, as calculated using the treasury stock method for options and warrants.
  
Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, except for the impact of FASB Staff Position (“FSP”) 157-2. FSP 157-2 deferred the adoption of SFAS 157 for non financial assets and liabilities until years beginning after November 15, 2008. The Company adopted SFAS 157 effective July 1, 2008 and it did not have a material effect on the Company's financial position and/or results of operations.
 
In February 2007, the FASB issued SFAS 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 their statement of operations at each subsequent reporting date on items for which the 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 results of operations. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company adopted SFAS 159 effective July 1, 2008.  The Company did not make any elections for fair value accounting and therefore, it did not record a cumulative-effect adjustment to its opening accumulated deficit balance.
 
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R changes accounting for acquisitions made by the Company with closing dates on or after July 1, 2009.  More transactions and events will qualify as business combinations and will be accounted for at fair value under the new standard.  SFAS 141R promotes greater use of fair values in financial reporting.  Some of the changes will introduce more volatility into earnings.  SFAS 141R is effective for fiscal years beginning on or after December 15, 2008.  SFAS 141R will have an impact on the Company’s financial position, results of operations, and cash flows, but the effect is dependant upon the acquisitions that may be made in the future.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), an amendment of ARB No. 51. SFAS 160 will change the accounting and reporting for minority interests which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of presentation and disclosure requirements for existing minority interests. The Company is currently assessing the impact that SFAS 160 may have on its financial position, results of operations, and cash flows.
 
 
 
 
57
 
 
In December 2007, the FASB issued Emerging Issues Task Force (“EITF”) Issue 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”). Collaborative arrangements are agreements between parties to participate in some type of joint operating activity. The task force provided indicators to help identify collaborative arrangements and provides for reporting of such arrangements on a gross or net basis pursuant to guidance in existing authoritative literature. The task force also expanded disclosure requirements about collaborative arrangements. This issue is effective for financial statements issued for fiscal years beginning after December 15, 2008 and is to be applied retrospectively for all collaborative arrangements existing as of the effective date. The Company is currently assessing the impact that EITF 07-1 may have on its financial position, results of operations, and cash flows.

In July 2008, FASB issued EITF 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock". This issue was added to the EITF's agenda with the purpose of providing an overall framework for determining whether an instrument is indexed to an entity's own stock and whether such instruments or embedded features are classified as equity or a liability.  This issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently assessing the impact that EITF 07-5 may have on its financial position, results of operations, and cash flows.

In October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective immediately, including prior periods for which financial statements have not been issued. Therefore, the Company adopted the provisions of FSP 157-3 in its financial statements in the quarter ended September 30, 2008. The adoption did not have an impact on the Company's financial position, results of operations, and cash flows.
 
In April 2009, the FASB issued FASB Staff Position FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 supersedes FSP 157-3 and provides significant guidance for determining when a market has become inactive as well as guidance for determining whether transactions are not orderly. FSP 157-4 also provides guidance on the use of valuation techniques and the use of broker quotes and pricing services. It reiterates that fair value is based on an exit price and also that fair value is market-driven and not entity-specific. FSP 157- 4 applies to all assets and liabilities within the scope of FAS 157. In addition, FSP 157-4 amends SFAS 157 to require interim disclosures of the inputs and valuation technique(s) used to measure fair value as well as disclosure of information regarding changes in valuation techniques and related inputs, if any, on an interim basis. FSP 157-4 is effective for all interim and annual periods ending after June 15, 2009. The Company adopted the provisions of FSP 157-4 in the quarter ended June 30, 2009.  The adoption did not have an impact on the Company’s financial position, results of operations, and cash flows.

In April 2009, the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2”). FSP 115-2 provides guidance related to determining the amount of an other-than-temporary impairment (“OTTI”) of debt securities and prescribes the method to be used to present information about an OTTI in the financial statements. In addition, FSP 115-2 extends the disclosure requirements of SFAS 115 and FSP 115-1, which were previously generally only required for annual periods, to interim periods. FSP 115-2 is effective for all interim and annual periods ending after June 15, 2009. The Company adopted the provisions of FSP 115-2 in the quarter ended June 30, 2009.  The adoption did not have an impact on the Company’s financial position, results of operations, and cash flows.

 
In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments”   (“FSP 107-1”). FSP 107-1 amends SFAS 107, “Disclosures about Fair Value of Financial Instruments,” to require its disclosures in the interim financial statements of publicly traded companies. FAS 107 requires disclosures of the fair value of all financial instruments (recognized or unrecognized) except for those specifically excepted by paragraph 8 of SFAS 107, when practicable to do so. An entity must also disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. FSP 107-1 is effective for all interim and annual periods ending after June 15, 2009. The Company adopted the provisions of FSP 107-1 in quarter ended June 30, 2009. Because FSP 107-1 requires only additional disclosures, the adoption of FSP 107-1 did not have an impact on the Company’s financial position, results of operations, and cash flows.

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"), which is effective for interim and annual periods ending after June 15, 2009. SFAS· 165 provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. The Company adopted the provisions of SFAS 165 in the fourth quarter of fiscal 2009 and it did not have a material impact on its consolidated financial position, results of' operations or cash flows. Refer to Note 17 for disclosure on subsequent events.
 
 
 
58
 
 

 
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162" ("SFAS 168"), which approved the FASB Accounting Standards Codification ("Codification") as the single source of authoritative United States accounting and reporting standards for all non-governmental entities, except for guidance issued by the Securities and Exchange Commission. The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. Therefore, beginning with the Company's first quarter of fiscal 2010, all references made to generally accepted accounting principles in the United States ("U.S. GAAP") will use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to change or alter existing U.S. GAAP, it is not expected to have any impact on the Company’s consolidated 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 the University of California, San Diego for certain patent rights.

The agreement with the University of California, San Diego was for a license previously licensed to Urigen, Inc.  In exchange for this license, the Company issued 1,846,400 common shares and is required to make annual maintenance payments of $20,000  per year through 2010 and then $25,000 per year thereafter and milestone payments of up to $625,000, which are based on certain events related to FDA approval. As of June 30, 2009, $25,000 of milestone payments have been incurred. The Company is also required to make royalty payments of 1.5% -3.0% of net sales of licensed products, with a minimum annual royalty of $35,000. The term of the agreement ends on the earlier of the expiration of the longest-lived 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, the Company 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 net residual intangible assets, as follows:

Cash
  
$
350,000
  
Receivable from Urigen, Inc.
    
120,000
  
(collected during the period ended June 30, 2006)
      
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 1,623,910 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.
This milestone was amended on November 11, 2008 to extend this portion of the agreement from three years to four years.

The summary of intangible assets acquired and related accumulated amortization as of June 30, 2009 and 2008 is as follows:
 
      2009        2008   
Patent and intellectual property rights
   $ 278,637     $ 278,637  
Less: Accumulated amortization
     (47,984 )     (33,556 ) 
Intangible assets, net
   $ 230,653     $ 245,081  

 
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 $14,428 for the years ended June 30, 2009 and 2008, respectively, which is included in research and development expense in the accompanying statements of operations. Future estimated amortization expense is as follows:
 
 
59
 



July 1, 2009 – June 30, 2010
  
$
14,428
  
July 1, 2010 – June 30, 2011
    
14,428
  
July 1, 2011 – June 30, 2012
    
14,428
  
July 1, 2012 – June 30, 2013
    
14,428
  
July 1, 2013 – June 30, 2014
    
14,428
  
Thereafter
    
158,513
  
   
$
230,653
  

 
4.  
Accrued Expenses

At June 30, 2009 and 2008, the accrued expenses were as follows:

         
June 30,
  
   
2009
    
2008
  
Accrued payroll
   $ 1,206,414     $ 465,139  
Accrued payroll taxes
     530,100       530,837  
Accrued expenses – other
     569,616       369,167  
    $ 2,306,130     $ 1,365,143  
                 
 
5.  
Contractual Obligations and Notes Payable

In November 2007, the Company entered into an agreement with M & P Patent AG (Mattern) under which we licensed worldwide rights to Mattern’s intra-nasal testosterone product for men.  The Mattern patent and intellectual property rights were not placed in service and were not being amortized, nor included in future amortization estimates, as of December 31, 2007. At December 31 2007, the Company had recorded a license payment to Mattern of one million shares of Urigen common stock and accrued $1,500,000 in milestone payments.  The Company terminated its license agreement with Mattern effective March 31, 2008.  Accordingly, the accrued liability and intangible asset was reversed and a general and administrative impairment expense of $99,750 was recorded, which represents the fair value of the one million shares of restricted stock that were issued.  The Company believes there will be no further payments to Mattern as a result of this transaction.

On November 17, 2006, the Company entered into an unsecured promissory note with 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”).  All amounts due under the note agreement are still outstanding as of June 30, 2009.  Also, the Company had issued 11,277 shares of Urigen N.A. Series B preferred stock, in connection with this note agreement, which was converted to common stock at the time of the Merger.  Interest expense paid was $0 and $8,000 for the years ended June 30, 2009 and 2008, respectively.  At June 30, 2009 and 2008, the Company owed accrued interest expense of $42,000 and $18,000, respectively.

On January 5, 2007, the Company entered into an unsecured promissory note with KTEC Holdings, Inc. in the amount of $100,000. Tracy Taylor who was the Company’s Chairman of the Board of Directors at the time, was President and Chief Executive Officer of the Kansas Technology Enterprise Corporation (KTEC).  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 are due and payable by the Company 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 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 had issued 5,639 shares of Urigen N.A. Series B preferred stock in connection with this note agreement, which was converted to common stock at the time of the Merger.  If this note is not paid when due, interest shall accrue thereafter at the rate of 18% per annum. All principal amounts due under the note agreement are still outstanding as of June 30, 2009. Interest paid was $0 and $4,088 for the years ended June 30, 2009 and 2008, respectively.  At June 30, 2009 and 2008, the Company owed accrued interest expense of $23,236 and $9,536, respectively.
 
 
 
60
 
 

 
On June 25, 2007, Valentis, Inc., upon approval of its Board of Directors, issued Benjamin F. McGraw, III, Pharm.D., who was the Company’s Chief Executive Officer, President and Treasurer prior to the Merger, a promissory note in the amount of $176,000 in lieu of accrued bonus compensation owed to Dr. McGraw.  This note was assumed by the Company pursuant to the Merger. The note bears interest at the rate of 5.0% per annum, may be prepaid by the Company in full or in part at anytime without premium or penalty and was due and payable in full on December 25, 2007.  On December 25, 2007, the note was extended through June 25, 2008.  On August 11, 2008, the note was extended through December 25, 2008.  On January 6, 2009, the note was extended through December 25, 2009.  Dr. McGraw was a member of the Board of Directors as of June 30, 2009 and resigned from the Board of Directors in July 2009.  At June 30, 2009 and June 30, 2008, the Company owed accrued interest expense of $17,600 and $8,800, respectively.

On August 6, 2008, the Company entered into an unsecured promissory note with C. Lowell Parsons, M.D. a director of the Company, in the amount of $40,000. 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 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The note is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  Dr. Parsons may, in his discretion, request payment of this note, in whole or in part in restricted common stock of the Company.  The rate of repayment in common stock is based on $0.15 per share.  All principal amounts due under the note agreement are still outstanding as of June 30, 2009. At June 30, 2009, the Company owed accrued interest expense of $5,417.

On August 6, 2008, the Company entered into an unsecured promissory note with J. Kellogg Parsons, M.D. the son of C. Lowell Parsons, M.D., a director of the Company, in the amount of $20,000. 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 15% simple interest.  The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The foregoing amount is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  Dr. Parsons may, in his discretion, request payment of this note, in whole or in part in restricted common stock of the Company.  The rate of repayment in common stock is based on $0.15 per share.  At June 30, 2009, the Company owed accrued interest expense of $2,708.
 
On August 12, 2008, the Company entered into an unsecured promissory note with William J. Garner, M.D., the Chief Executive Officer and a director of the Company, in the amount of $5,000. 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 15% simple interest.  The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The foregoing amount is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  At June 30, 2009, the Company owed accrued interest expense of $665.

On September 19, 2008, the Company entered into an unsecured promissory note with William J. Garner, M.D., the Chief Executive Officer and a director of the Company, in the amount of $20,000. 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 15% simple interest.  The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The foregoing amount is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  At June 30, 2009, the Company owed accrued interest expense of $2,342.
 
On September 22, 2008, the Company entered into an unsecured promissory note with C. Lowell Parsons, M.D. a director of the Company, in the amount of $30,000. 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 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The note is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  Dr. Parsons may, in his discretion, request payment of this note, in whole or in part in restricted common stock of the Company.  The rate of repayment in common stock is based on $0.15 per share.  At June 30, 2009, the Company owed accrued interest expense of $3,475.

On September 25, 2008, the Company entered into an unsecured promissory note with C. Lowell Parsons, M.D. a director of the Company, in the amount of $70,000. 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 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The note is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  Dr. Parsons may, in his discretion, request payment of this note, in whole or in part in restricted common stock of the Company.  The rate of repayment in common stock is based on $0.15 per share.  At June 30, 2009, the Company owed accrued interest expense of $8,021.

 
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On October 6, 2008, the Company entered into an unsecured promissory note with a third party, in the amount of $20,000. 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 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a Bridge Loan of a minimum of $300,000.  The note  is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two (2) calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  The note holder may, in their discretion, request payment of this note, in whole or in part in restricted common stock of the Company.  The rate of repayment in common stock is based on $0.15 per share. At June 30, 2009, the Company owed accrued interest expense of $2,208.

The Company entered into a note purchase agreement (the “Note”) dated as of January 9, 2009 with Platinum-Montaur Life Science, LLC (“Platinum” or the “Holder”) for the sale of 10% senior secured convertible promissory notes in the aggregate principal amount of $257,000. The Note matures on October 9, 2009. Interest at the rate of 10% per annum is payable quarterly commencing April 1, 2009 and on the maturity date. Interest is payable at the option of the Company, in cash or in registered shares of the Company’s stock under certain conditions. However, the Company may not issue shares toward the payment of interest in excess of 20% of the aggregate dollar trading volume of the Company’s stock over the 20 consecutive trading days immediately prior to the interest payment date.  As of June 30, 2009, the Company owed accrued interest expense of $13,125.

The Note currently is convertible into shares of the Company’s common stock at a conversion price of $0.10 per share.

Pursuant to the terms of the Note, events of default include, but are not limited to: (i) failure to pay principal or any payments due under the Note or to timely deliver any shares of common stock upon conversion of the Note or any interest, (ii) failure to comply with any covenant or agreement contained in the Note, the purchase agreement or any other document executed in connection with the purchase agreement, (iii) suspension of listing or failure to be listed on at least the OTC Bulletin Board, the AMEX, the Nasdaq Capital Markers, the Nasdaq Global Market, the Nasdaq Global Select Market or the NYSE for a period of 5 consecutive trading days, (iv) the Company’s notice to the Holder of its inability to comply or its intention not to comply with requests for conversion of the Note into shares of the Company’s common stock, (v) failure of the Company to instruct its transfer agent to remove any legends from shares eligible to be sold under Rule 144 and issued such clean stock certificates within 3 business days of the Holder’s request, (vi) the Company shall apply for or consent to the appointment of or the taking of possession by a receive, custodian, trustee or liquidator or makes a general assignment for the benefit of its creditors or commences a voluntary case of bankruptcy, files a petition seeking protection of bankruptcy, insolvency, moratorium, reorganization or other similar law, acquiesces in the filing of a petition against it in an involuntary case under the United States Bankruptcy Code, issues a notice of bankruptcy or winding down of its operations or issues a press release regarding same.

In addition to the foregoing:

· 
The Company granted to Platinum the right to subscribe for an additional amount of securities of the Company in any subsequent financing conducted by the Company for the period commencing on the closing date of this Note through the date the Note is repaid. In addition, if the Company enters into any subsequent financing on terms more favorable than the terms of the Note then the Holder has the option to exchange the Note together with accrued and unpaid interest for the securities to be issued in the subsequent financing.

· 
The Company agreed not to issue any variable equity securities, as such term is defined in the purchase agreement, unless the Company receives the prior written approval of Platinum. Variable equity securities include, but are not limited to, (A) any debt or equity securities which are convertible into, exercisable or exchangeable for, or carry the right to receive additional shares of common stock, (B) any amortizing convertible security which amortizes prior to its maturity date, where the Company is required to or has the option to make such amortization payment in shares of common stock, or (C) any equity line transaction.

· 
The Company granted Platinum piggy-back registration rights in connection with the shares of common stock issuable upon conversion of the Note.

· 
The Company has agreed to reserve 120% of the number of shares into with the Note is convertible.

· 
As security for the payment of the Note the Company and its wholly owned subsidiary, Urigen, N.A., Inc. (“Urigen N.A.”) entered into a security agreement and patent, trademark and copyright security agreement pursuant to which they pledged all of their assets. In addition, Urigen N.A. executed a guaranty guaranteeing the obligations of the Company under the purchase agreement.

· 
The terms of the Note provide that it may not be converted if such exercise would result in the Holder having beneficial ownership of more than 4.99% of the Company’s outstanding common stock; provided that the Holder may waive this provision upon 61 days notice; and provided further that such ownership limitation may not exceed 9.9%.
 
 
 
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·
In the event that the Company issues or sells any additional shares of common stock or any rights or warrants or options to purchase shares at a price that is less than the conversion price, then the conversion price shall be adjusted to the lower price at which such additional shares were issued or sold. The Company will not be required to make any adjustment to the conversion price in connection with (A) issuances of shares of common stock or options to its employees, officers or directors pursuant to any existing stock or option plan, (B) securities issued pursuant to acquisitions or strategic transactions or (C)  issuances of securities upon the exercise or exchange of or conversion of the Note and other securities exercisable or exchangeable for or convertible into shares of common stock issued and outstanding as of the date of the purchase agreement.

·
In the event of a default as described in the Note, the Holder shall have the right to require the Company to repay in cash all or a portion of the Note plus all accrued but unpaid interest at a price of 110% of the aggregate principal amount of the Note plus all accrued and unpaid interest.

The issuance of this Note resulted in a change to the conversion price per share of the Series B Convertible Preferred Stock issued pursuant to the terms of the Series B Convertible Preferred Stock Purchase Agreement dated as of July 31, 2007 (see Note 10).
 
On January 21, 2009, the Company entered into an unsecured non interest bearing convertible promissory note of $50,000 with a third party.   The note matures on December 31, 2009. Under the terms of the note, the third party will perform consulting services for the Company.  Under the terms of the note, the Company may prepay in whole or in part without premium or penalty, at any time.  At any time prior to or at the time of prepayment of this note, the holder may elect to convert some or all of the principal owing under this note into shares of the Company’s common stock at the rate of $0.02 per share.  The holder’s right to convert the obligations due under this note to common stock shall supersede the Company’s right to repay such obligations in cash. The conversion rate of this note generated a beneficial conversion feature that resulted in a note discount of $50,000. The note discount is being amortized as additional interest expense over the term of the note.

On April 28, 2009, the Company entered into an Amendment (the “Amendment”) to the Note Purchase Agreement dated as of January 9, 2009 with Platinum-Montaur Life Science, LLC. Pursuant to the Amendment the Company issued a 10% senior secured convertible promissory note in the principal amount of $40,000. This note matures on October 9, 2009. The terms of this note are the same as the Note issued by the Company pursuant to the note purchase agreement on January 9, 2009.  It is stipulated in this note that the proceeds shall be used by the Company to retain CEOcast, Inc. to render investor relations services.

On June 12, 2009, the Company entered into an unsecured promissory note with C. Lowell Parsons, M.D. a director of the Company, in the amount of $15,000. 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 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The note is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  Dr. Parsons may, in his discretion, request payment of this note, in whole or in part in restricted common stock of the Company.  The rate of repayment in common stock is based on $0.15 per share.  At June 30, 2009, the Company owed accrued interest expense of $113.

Contractual Obligations

On November 1, 2008, the Company entered into a consulting agreement with FLP Pharma LLC pursuant to which Mr. Nida would provide consulting services to the Company for a term commencing on November 1, 2008 through December 31, 2009. The Consulting Agreement provides for compensation of $200 per hour for a maximum amount of 50 hours monthly. Also, the Consulting Agreement provided that the agreement may be terminated by either party upon two weeks prior written notice; provided however, if the agreement is terminated by Company, the Company would be obligated to pay to Mr. Nida certain amounts owed pursuant to his employment agreement with the Company dated as of May 1, 2006.  The agreement was terminated by Mr. Nida in January 2009.  As of June 30, 2009, Mr. Nida provided $6,700 of consulting services.

On November 1, 2008, the Company entered into a consulting agreement with Dennis H. Giesing pursuant to which Dr. Giesing would provide consulting services to the Company for a term commencing on November 1, 2008 through November 1, 2009. Pursuant to the terms of the Consulting Agreement, Dr. Giesing would provide services to the Company on an “as needed” basis not to exceed 4 days per month at a rate of $2,000 per day. The Consulting Agreement provided that either party may terminate the agreement upon written notice.  As of June 30, 2009, Dr. Giesing had not provided any consulting services to the Company.


6.
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 amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows as of June 30, 2009 and 2008:

 
63
 

   
2009
    
2008
  
Deferred Tax Assets:
            
   Accrued Compensation
   $ 480,568     $ 180,904  
   Other Accrued Expenses
     217,538       331,689  
   Restricted Stock
     11,178       8,151  
   Net Operating Losses
     2,656,151       2,003,932  
   Tax Credits
     144,603       128,713  
Total Deferred Tax Assets
     3,510,038       2,653,389  
                 
Deferred Tax Liabilities:
                
   Intangible Assets
     (1,432 )     (1,652 )
   Beneficial Conversion Feature on Convertible Notes
     (9,959 )     -  
Total Deferred Tax Liabilities
     (11,391 )     (1,652 )
                 
Valuation Allowance
     (3,498,647 )     (2,651,737 )
                 
Net Deferred Tax Asset
   $ -     $ -  
                 

SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”) requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. Because of the Company's history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a full valuation allowance.  The valuation allowance increased by $846,910 at June 30, 2009 and by $1,487,382 at June 30, 2008.

The amount of the valuation allowance for deferred tax assets associated with excess tax deductions from stock-based compensation arrangements is $0.

Net operating losses and tax credit carry forwards as of June 30, 2009 are as follows:
 
   
Amount
  
Expiration Years
           
Net operating losses, Federal
  
$
6,668,334
  
Beginning in 2027
           
Net operating losses, State
    
6,665,934
  
Beginning in 2017
           
Tax credits, Federal
    
85,351
  
Beginning in 2027
           
Tax credits, State
    
89,775
  
N/A
           
           

The effective tax rate of the Company's provision (benefit) for income taxes differs from the federal statutory rate as follows:

   
2009
    
2008
  
             
Statuary Rate
     34.00 %     34.00 %
                 
State Tax
     6.04 %     4.80 %
                 
Other
     -0.12 %     -8.74 %
                 
Tax credits
     0.42 %     0.67 %
                 
Valuation Allowance
     -40.34 %     -30.73 %
                 
Total
     0.00 %     0.00 %
                 

Our policy is to recognize interest and penalties related to income taxes as a component of other income (expense). We are subject to income tax examinations for U.S. incomes taxes and state income taxes from 2007 forward. We do not anticipate that total unrecognized tax benefits will significantly change prior to June 30, 2010.
 
7.
Common Stock

Issuance of Urigen N.A. Common Stock

In July 2005, Urigen N.A. issued 5 shares of common stock at $0.22169 per share upon incorporation.

In December 2005, Urigen N.A. issued 27,065,169 shares of common stock to Urigen, Inc. shareholders at $0.00002 per share for aggregate proceeds of $559.

In January 2006, Urigen N.A. issued 3,947,004 shares of common stock to Urigen, Inc. shareholders at $0.00002 per share for aggregate proceeds of $88. Also, 9,473 shares of common stock were issued at $0.19316 per share for aggregate proceeds of $1,830 in lieu of rent payment.
 
 
 
 
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In March 2006, Urigen N.A. issued 9,473 shares of common stock at $0.19316 per share for aggregate proceeds of $1,798 in lieu of rent payment.

In April 2006, Urigen N.A. issued 45,109 shares of common stock at $0.18972 per share for aggregate proceeds of $8,558 pursuant to an exercise of a stock option.

In May 2006, Urigen N.A. issued 1,894,562 shares of common stock at $0.05542 per share, net of issuance costs of $2,926, pursuant to a consulting agreement. Urigen N.A. also issued 1,623,910 shares of common stock at $0.05542 per share pursuant to a licensing agreement.

In June 2006, Urigen N.A. issued 9,473 shares of common stock at $0.19799 per share for aggregate proceeds of $1,875 in lieu of rent payment.

In August 2006, Urigen N.A. issued 112,722 shares of common stock at $0.05542 per share for aggregate proceeds of $6,250 pursuant to a consulting agreement. Urigen N.A. also received payment for 33,831 shares of subscribed common stock at $0.19956 per share for aggregate proceeds of $6,752. In September 2006, 22,554 shares of common stock were issued.

In September 2006, Urigen N.A. issued 112,072 shares of common stock at a range of $0.19666 to $0.19801 per share for aggregate proceeds of $22,102 in lieu of consulting payments. Urigen N.A. also issued 112,772 shares of common stock at $0.05542 per share for aggregate proceeds of $6,250 pursuant to a consulting agreement. Urigen N.A. also issued 9,473 shares of common stock at $0.19899 per share for aggregate proceeds of $1,885 in lieu of rent payment.
 
On June 28, 2007, the Urigen N.A. Series A preferred shareholders voted to convert 9,831,285 shares of Urigen N.A. Series A preferred stock to 9,831,285 shares of Urigen N.A. common stock.
 

On July 13, 2007, 44,805,106 shares of Urigen N.A. common stock converted to 44,805,106 shares of the Company’s common stock pursuant to the Merger.  At the time of the Merger, Valentis Inc. had 17,062,856 shares of common stock outstanding.

Issuance of Urigen Pharmaceuticals Inc. Common Stock

Also at the time of the Merger, on July 13, 2007, 6,421,573 shares of Urigen N.A. Series B preferred stock were converted to 6,421,573 shares of the Company’s common stock.  

In November 2007, the Company issued 1,000,000 shares of common stock at $0.09875 per share to M & P Patent AG under a license agreement, for a total value of $99,750.

In June 2008, the Company issued 380,000 shares of common stock (subscribed in January 2008) at $0.0855 per share pursuant to a vendor agreement, for a total value of $32,490.

In November 2008, the Company issued 1,363,150 shares of common stock (subscribed in December 2007) pursuant to various employment agreements, for a total aggregate value of $36,798.

In November 2008, the Company issued 1,870,583 shares of common stock (subscribed between January and June 2008) for aggregate proceeds of $318,000.

In November 2008, the Company issued 431,059 shares of common stock (subscribed between January and June 2008) pursuant to various vendor and consultant agreements, for a total value of $54,868.

In November 2008, the Company issued 100,000 shares of common stock at $0.076 per share pursuant to an employment agreement, for a total value of $7,600.

In January 2009, the Company issued 60,000 shares of common stock (subscribed in May 2008) at $0.12 per share pursuant to a vendor agreement for a total value of $7,200.


8.   Urigen N.A. Series A Convertible Preferred Stock

From July 18, 2005 (date of inception) to June 27, 2007, Urigen N.A. issued 9,826,684 shares of Series A convertible preferred stock (“Series A”) at a range of $0.13 to $0.20 per share resulting in gross aggregate proceeds of $1,898,292. Issuance costs of $5,977 were incurred as part of the issuance.  These shares were converted to common stock on June 28, 2007.  Presented below is the detail of these issuances from inception to June 30, 2007.

In July 2005, Urigen N.A. received a payment for 225,543 shares of subscribed Series A preferred stock at $0.19546 per share for aggregate proceeds of $44,085. The Series A preferred stock was issued in June 2006.
 
 
 
 
65
 

 
In August 2005, Urigen N.A. received a payment for 338,315 shares of subscribed Series A preferred stock at $0.19453 per share for aggregate proceeds of $65,813. The Series A preferred stock was issued in June 2006.

In September 2005, Urigen N.A. received payment for 676,629 shares of subscribed Series A preferred stock at a range of $0.19453 to $0.19497 per share for aggregate proceeds of $131,725. The Series A preferred stock was issued in June 2006.

In October 2005, Urigen N.A. received payment for 696,603 shares of subscribed Series A preferred stock at a range of $0.19200 to $0.19546 per share for aggregate proceeds of $135,054. The Series A preferred stock was issued in June 2006.

In November 2005, Urigen N.A. received payment for 530,974 shares of subscribed Series A preferred stock at $0.19457 per share for aggregate proceeds of $103,314. The Series A preferred stock was issued in June 2006.

In December 2005, Urigen N.A. received payment for 593,233 shares of subscribed Series A preferred stock at a range of $0.19238 to $0.20187 per share for aggregate proceeds of $116,709. The Series A preferred stock was issued in June 2006.

In January 2006, Urigen N.A. converted then outstanding notes into 4,293,448 shares of subscribed Series A preferred stock at a range of $0.12505 to $0.19801 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 statement of operations.

In February 2006, Urigen N.A. received payment for 925,146 shares of subscribed Series A preferred stock at a range of $0.19072 to $0.19305 per share for aggregate proceeds of $178,286. The Series A preferred stock was issued in June 2006.

In March 2006, Urigen N.A. received payment for 583,827 shares of subscribed Series A preferred stock at a range of $0.18994 to $0.19564 per share for aggregate proceeds of $111,640. The Series A preferred stock was issued in June 2006.

In April 2006, Urigen N.A. received payment for 331,197 shares of subscribed Series A preferred stock at a range of $0.19070 to $0.19546 per share for aggregate proceeds of $63,661. The Series A preferred stock was issued in June 2006.

In May 2006, Urigen N.A. received payment for 132,746 shares of subscribed Series A preferred stock at $0.19990 per share for aggregate proceeds of $26,535. The Series A preferred stock was issued in June 2006.

In June 2006, Urigen N.A. received payment or subscription agreements for 499,023 shares of subscribed Series A preferred stock at a range of $0.19799 to $0.20063 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, Urigen N.A. issued 4,601 shares of Series A preferred stock to correct a previous issuance.

On June 28, 2007, the Urigen N.A. Series A preferred shareholders voted to convert 9,831,285 shares of Urigen N.A. Series A preferred stock to 9,831,285 shares of Urigen N.A. common stock.  These shares were then converted to common shares of the Company’s stock, at the time of the Merger.


 
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9.
Urigen N.A. Series B Convertible Preferred Stock

In the year ended June 30, 2007, Urigen N.A. issued 1,872,008 shares of Urigen N.A. Series B preferred stock (“Series B”) at $0.22169 per share resulting in gross aggregate proceeds of $415,000.  In addition, Urigen N.A. issued 4,157,922 shares of Series B preferred stock in lieu of cash compensation to employees and consultants and for other matters.  Presented below is the detail of these issuances from inception to June 30, 2007.

In October 2006, Urigen N.A. received payment for 518,749 shares of subscribed Series B preferred stock at $0.22169 per share for aggregate proceeds of $115,000. The Series B preferred stock was issued in October 2006. Urigen N.A. also issued 11,277 shares of Series B preferred stock at $0.22169 per share for an aggregate of $2,500 pursuant to an exchange agreement. Urigen N.A. also issued 45,109 shares of Series B preferred stock at $0.22169 per share for an aggregate of $10,000 pursuant to a vendor agreement. Urigen N.A. issued 11,277 shares of Series B preferred stock at $0.22169 per share for an aggregate of $2,500 pursuant to a promissory note.

In November 2006, Urigen N.A. received payment for 1,127,716 shares of subscribed Series B preferred stock at $0.22169 per share for aggregate proceeds of $250,000. The Series B preferred stock was issued in November 2006. Urigen N.A. also issued 45,109 shares of Series B preferred stock at $0.22169 per share for an aggregate of $10,000 pursuant to a vendor agreement.

In December 2006, Urigen N.A. issued 45,109 shares of Series B preferred stock at $0.22169 per share for an aggregate of $10,000 pursuant to a vendor agreement.

In January 2007, Urigen N.A. issued 451,086 shares of Series B preferred stock at $0.22169 per share for an aggregate of $100,000 to an officer in lieu of payroll. Urigen N.A. also issued 216,521 shares of Series B preferred stock at $0.22169 per share for an aggregate of $48,000 pursuant to a consulting agreement. Urigen N.A. also issued 5,639 shares of Series B preferred stock at $0.22169 per share for an aggregate of $1,250 pursuant to a promissory note. Also, Urigen N.A. issued 45,109 shares of Series B preferred stock at $0.22169 per share for an aggregate of $10,000 pursuant to a vendor agreement. Urigen N.A. also issued 225,543 shares of Series B preferred stock at $0.22169 per share for aggregate proceeds of $50,000.

In February 2007, Urigen N.A. issued 112,771 shares of Series B preferred stock at $0.22169 per share for an aggregate of $25,000 to an officer in lieu of payroll. Urigen N.A. also issued 45,109 shares of Series B preferred stock at $0.22169 per share for an aggregate of $10,000 pursuant to a vendor agreement.

In March 2007, Urigen N.A. issued 112,771 shares of Series B preferred stock at $0.22169 per share for an aggregate of $25,000 to an officer in lieu of payroll. Urigen N.A. also issued 45,109 shares of Series B preferred stock at $0.22169 per share for an aggregate of $10,000 pursuant to a vendor agreement.

In April 2007, Urigen N.A. issued 45,109 shares of Series B preferred stock at $0.22169 per share for an aggregate of $10,000 pursuant to a vendor agreement.  Urigen N.A. also issued 112,771 shares of Series B preferred stock at $0.22169 per share for an aggregate of $25,000 to an officer in lieu of payroll.
 
In May 2007, Urigen N.A. issued 45,109 shares of Series B preferred stock at $0.22169 per share for an aggregate of $10,000 pursuant to a vendor agreement.  Urigen N.A. also issued 112,771 shares of Series B preferred stock at $0.22169 per share for an aggregate of $25,000 to an officer in lieu of payroll.  Urigen N.A. also issued 5,639 shares of Series B preferred stock at $0.22169 per share for an aggregate of $1,250 pursuant to a vendor agreement.  Urigen N.A. also issued 36,087 shares of Series B preferred stock at $0.22169 per share for an aggregate of $8,000 pursuant to a consulting agreement.  Urigen N.A. also issued 287,297 shares of Series B preferred stock at $0.22169 per share for an aggregate of $63,690 to a consultant.  Urigen N.A. also issued 1,982,828 shares of Series B preferred stock at $0.22169 per share for an aggregate of $439,567 to employees in lieu of cash payroll for the period from October 2006 through May 2007.  Urigen N.A. also issued 180,434 shares of Series B preferred stock at $0.22169 per share for an aggregate of $40,000 to consultants.

In June 2007, Urigen N.A. issued 112,771 shares of Series B preferred stock at $0.22169 per share for an aggregate of $25,000 to an officer in lieu of payroll. Urigen N.A. also issued 45,109 shares of Series B preferred stock at $0.22169 per share for an aggregate of $10,000 pursuant to a vendor agreement.

In July 2007, Urigen N.A. issued 45,109 shares of Series B preferred stock at $0.22169 per share for an aggregate of $10,000 pursuant to a vendor agreement.  Urigen N.A. also issued 72,004 shares of Series B preferred stock at $0.22169 per share for an aggregate of $15,962 pursuant to a consulting agreement.  Urigen N.A. also issued 274,531 shares of Series B preferred stock at $0.22169 per share for an aggregate of $60,860 to officers in lieu of payroll.

On July 13, 2007, 6,421,573 shares of Urigen N.A. Series B preferred stock converted to 6,421,573 shares of the Company’s common stock, pursuant to the Merger.

10.
Urigen Pharmaceuticals Inc. Series B Convertible Preferred Stock

On July 26, 2007, the Board of Directors of Urigen Pharmaceuticals, Inc., formerly 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, par value $0.001, 10,000,000 shares authorized, 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 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 $0.001 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.
 
 
 
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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.   This conversion price of the Series B convertible preferred stock will be adjusted upon the occurrence of the following:
 
A. Effectuation of a reverse stock split-conversion price shall be proportionally decreased.
B. Combination of the outstanding shares of the Company – price shall be proportionately increased.
C. Dividend or other distribution in shares of common stock – conversion price shall be decreased by multiplying the conversion price by a fraction, the numerator of which shall be the total number of common stock outstanding immediately prior to the time of such issuance or the close of business on such record date and the denominator of which shall be the total number of shares of common stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of common stock issuable in payment of such dividend or distribution.
D. Dividend or other distribution in securities other than shares of common stock – the number of securities the holder would have received had the holder of the Series B preferred stock converted their shares to/into common stock prior to such event.
E. If the common stock is changed to the same or different number of shares of any class or classes of stock, whether by reclassification, exchange, substitution or otherwise (other than by way of a stock split or combination of shares or stock dividends discussed above) – an appropriate revision to the conversion price so that the holders of the Series B preferred stock shall have the right to convert into the kind and amount of securities receivable upon reclassification, exchange, substitution or other change by holders of common stock into which the Series B preferred stock was convertible into prior to the trigger event.
 F. If reorganization of the Company (other than by way of a stock split or combination of shares or stock dividends or distributions or reclassification, exchange or substitution of shares discussed above), or merger or consolidation with or into another company, or the sale of all or substantially all of the Company’s properties or assets to any other person – appropriate revision in the conversion price so that the holders will have the right to convert the Series B preferred stock into the kind and amount of stock and other securities or property of the Company or any successor corporation as the holder would have received if the holder had converted into common stock prior to trigger event.
G. If the Company issues or sells any additional shares of common stock (other than provided above or the exercise or conversion of convertible securities issued prior to the Series B preferred stock) at a price less than the conversion price – conversion price shall be reset to the price at which such additional shares are issued or sold.
H. If the Company issues any securities convertible into or exchangeable for common stock or any rights or warrants or options to purchase such common stock or convertible securities (“Common Stock Equivalents”), other than the Series B preferred stock or warrants issued to the holders, and the aggregate of the price per share for which additional shares of common may be issued thereafter pursuant to such Common Stock Equivalent plus the consideration received by the Company for issuance of such Common Stock Equivalents divided by the number of shares issuable pursuant to such Common Stock Equivalent ( “Aggregate Per Common Share price”) shall be less than the conversion price-the conversion price shall be adjusted to the Aggregate Per Common Share Price.
No adjustment in the conversion price shall be made in the event of the following issuances:
(i) shares of common stock or options to employees, officers or directors of the Company pursuant to any stock or option plan;
(ii) securities upon the exercise or exchange of or conversion of any securities issued pursuant to the Certificate of Designation and/or securities exercisable or exchangeable for or convertible into shares of common stock issued and outstanding on the date of issuance of the series B preferred stock, provided that such securities have not been subsequently amended to increase the number of such securities or to decrease the exercise, exchange or conversion price of any such securities;
(iii) securities issued pursuant to acquisitions or strategic transactions (including license agreements), provided any such issuance shall only be to a person which is, itself or through its subsidiaries, an operating company in a business synergistic with the business of the Company and in which the Company receives benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities; and
(iv) securities issued to Platinum pursuant to the Purchase Agreement.

As of June 30, 2009, the Series B preferred stock conversion price was adjusted to $0.10 per share, as a result of another issuance at a lower price.

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.  On December 13, 2007, registration by the Company of 13,120,000 of the underlying shares became effective.  On February 11, 2009 Platinum approved a 180 day extension of time from January 22, 2009 to July 22, 2009 to file an additional registration statement for the balance of the shares of common stock. The Company is currently in negotiations with Platinum to obtain an additional extension for an additional 180 days to January 18, 2010.
 
 
 
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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.
 
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.

· 
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 would have resulted in the imposition of liquidated damages of 1.5% per month until the amendment to the Bylaw was effected.  On October 3, 2007, Platinum extended the amendment deadline to October 17, 2007, without penalty.  The bylaw amendment became effective October 16, 2007.

The Company received an SEC comment letter on October 26, 2007 related to the filing of its Form S-1 Registration Statement.  The Company was not in compliance as of November 9, 2007 with its obligations under the Registration Rights Agreement dated as of August 1, 2007, entered into with  Platinum to respond to SEC comments within 14 days of receipt of a comment letter. Failure of the Company to meet this schedule provided in the Registration Rights Agreement resulted in the imposition of liquidated damages of $31,500, which was paid in cash.

In December 2005, the SEC published guidance on the application of the EITF Issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”) in relation to the effect of cash liquidated damages provisions in accounting for conversion features of convertible equity securities. Due to this interpretation of EITF 00-19, the Company classified the $2.1 million private placement of Series B preferred stock as a liability not equity for the period ended September 30, 2007.  The Company determined that the liquidated damages could result in net-cash settlement of a conversion in accordance with EITF 00-19.  EITF 00-19 requires freestanding contracts that are settled in a Company’s own stock to be designated as an equity instrument, assets or liability. Under the provisions of EITF 00-19, a contract designated as an asset or liability must be initially recorded and carried at fair value until the contract meets the requirements for classification as equity, until the contract is exercised or until the contract expires.
 
 Accordingly, at September 30, 2007, the Company determined that the Series B preferred stock should be accounted for as a liability and thus recorded the proceeds received from the issuance of the Series B preferred stock as a preferred stock liability on the consolidated balance sheet in the amount of $2,100,000. Since the warrants issued to the investors were not covered by the net-cash settlement provision they were determined to be equity in accordance with EITF 00-19. The Company valued the warrants using the Black-Scholes model and recorded $1,127,557 to equity. In accordance with EITF 00-19, the Company compared the amount allocated to the Series B preferred stock to the fair value of the common stock that would be received upon conversion to determine if a beneficial conversion feature existed. The Company determined that a beneficial conversion feature of $972,443 existed and, in accordance with EITF 00-19, accreted that amount and the relative fair value amount allocated to the warrants immediately, as the Series B preferred stock is immediately convertible. This accretion was recorded as non-cash interest expense in the accompanying consolidated statement of operations.

During the three month period ended December 31, 2007, based on changes in market value of the underlying shares, and based on registration of 13,120,000 of the underlying shares becoming effective on December 13, 2007, the Company, in accordance with EITF 00-19, recognized the change in fair value as other income in the amount of $894,316 and reclassified $1,087,579 of liability related to Series B preferred stock to equity.  In addition, the Company reclassified $911,179 of Series B preferred stock beneficial conversion feature liability to additional paid-in capital based on the proportion of shares registered and declared effective by the SEC on December 13, 2007.  During the year ended June 30, 2008, based on changes in market value of the remaining unregistered shares classified as a liability, the Company, in accordance with EITF 00-19, recognized an additional change in fair value as other income in the amount of $55,579, for a total of $949,895 for the year.  During the year ended June 30, 2009, based on changes in market value of the remaining unregistered shares classified as a liability, the Company recognized $366,674 as other expense.

As discussed in Note 5 above, on January 9, 2009, the Company issued secured convertible notes payable at a lower conversion price than the conversion price under the July 2007 Series B Convertible Preferred Stock agreement.  This resulted in a change to the conversion price of the July 2007 Series B Convertible Preferred Stock agreement from $0.15 per share to $0.10 per share, which upon conversion by the holder of the preferred stock would result in the conversion to 21 million shares of common stock instead of 14 million shares of common stock as per the terms of the original agreement.  The issuance of the January 9, 2009 note also resulted in the price reset of the warrant exercise price from $0.18 per share to $0.125 per share, which would reduce the gross proceeds received upon exercise of the warrants from $2.52 million to $1.75 million.

The impact of this modification to the conversion price of the Company’s Series B Preferred Stock also resulted in a $202,000 incremental beneficial conversion feature from that originally recorded in the quarter ended September 30, 2007 upon the closing of the July 2007 Series B Convertible Preferred Stock agreement.  This incremental beneficial conversion feature was allocated by a $14,000 charge to interest expense and an increase in the Series B convertible beneficial conversion feature liability included in the accompanying consolidated balance sheet, with the remaining $188,000 resulting in offsetting entries to additional paid-in capital for the portion of shares registered prior to this new note.
 
 
 
69
 
  
In addition, as a result of 21 million shares of common stock now being issuable upon conversion of the July 2007 Series B Convertible Preferred Stock, the number of unregistered shares under this agreement increased from 880,000 shares to 7,880,000 shares and thereby, the potential cash settlement the Company would be required to make if it were unable to issue registered shares upon conversion also increased.  This resulted in a reclassification of $700,000 from additional paid-in capital to Series B convertible preferred stock liability.  In accordance with EITF 00-19, the change in fair value of the agreement during the period the agreement was classified as equity should be accounted for as an adjustment to equity and therefore, the Company recorded a $420,000 increase to additional paid-in capital and a decrease to Series B convertible preferred stock liability to reflect the decrease in fair value of the Company’s stock from December 13, 2007 to January 9, 2009.  Subsequent to the reclassification from equity to liability, in accordance with EITF 00-19, the portion now classified as a liability should be marked to fair value through earnings/loss.  Therefore, for the period from January 9, 2009 to March 31, 2009, a $385,000 mark to market charge increased other expense and increased the Series B convertible preferred stock liability.  The net impact of this increase in shares issuable upon conversion and potential cash settlement liability of more unregistered shares resulted in a $665,000 increase to the liability, a $280,000 decrease to additional paid-in capital, and a $385,000 charge to other expense.
 
 11.
Stock Subscribed

In August 2006, Urigen N.A. received payment for 33,831 shares of subscribed common stock at $0.19956 per share for aggregate proceeds of $6,752.  In September 2006, 22,554 shares were issued and 11,277 shares at $2,251 remained as subscribed stock at June 30, 2007.  Subsequent to June 30, 2007, these 11,277 shares were written off.

In December 2006, Urigen N.A. had 840,825 shares of subscribed Series B preferred stock at $0.22169 per share for an aggregate of $186,400 to officers of Urigen N.A. 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, Urigen N.A. had 36,087 shares of subscribed Series B preferred stock at $0.22169 per share for an aggregate of $8,000 to a consultant in lieu of cash fees.  Urigen N.A. also had 35,917 shares of subscribed Series B preferred stock at $0.22169 per share for an aggregate of $7,962 to another consultant in lieu of cash fees.  Urigen N.A. also had 274,531 shares of subscribed Series B preferred stock at $0.22169 per share for an aggregate of $60,860 to officers of Urigen N.A. in lieu of cash payroll for the month of June 2007.  These 346,535 shares at $76,822 remained as subscribed stock at June 30, 2007.  In July 2007, Urigen N.A. issued the balance of 346,535 shares of subscribed Series B preferred stock.  All Urigen N.A. Series B preferred stock was then converted to shares of the Company’s common stock pursuant to the Merger.

In December 2007, the Company issued 63,150 shares of subscribed common stock at a range of $0.09975 to $0.27550 per share for an aggregate of $6,299 to two former employees of the Company.  The Company also issued 540,815 shares of subscribed common stock at a range of $0.09975 to $0.27550 per share for an aggregate of $71,320 pursuant to vendor agreements.  The Company also issued 1,300,000 shares of subscribed restricted common stock to two employees pursuant to Employee Restricted Stock Agreements. See Note 14 for stock-based compensation expense.

In January 2008, the Company issued 20,000 shares of subscribed common stock at $0.171 per share for an aggregate of $3,420 to a consultant pursuant to a consulting agreement.  The Company also issued 500,000 shares of subscribed common stock at $0.20 per share and 250,000 warrants at $0.25 per share for aggregate proceeds of $100,000.  The Company also issued 380,000 shares of subscribed common stock at $0.1045 per share for an aggregate of $39,710 pursuant to a vendor agreement.  The 380,000 shares were issued in June 2008.  The agreement provides warrants to purchase additional common stock at $0.15 per share.  The number of warrants to be issued is contingent upon the increase in value of the Company’s stock from an initial closing price of $0.12 per share on January 31, 2008 with a maximum number of approximately 1 million warrants issuable under the agreement.

In January 2008, the Company issued 58,125 shares of subscribed common stock at $0.1805 per share for an aggregate of $10,491 pursuant to the Company’s directors’ compensation agreement.
 
In April 2008, the Company issued 726,470 shares of subscribed common stock at $0.17 per share and 363,235 warrants at $0.22 per share for aggregate proceeds of $123,500. For a period of one hundred and twenty (120) days following the closing date of the offering, in the event the Company, should sell any additional shares of its common stock in an equity financing transaction subsequent to the closing of the offering at a price per share less than this purchase price (the “Subsequent Offering Price”), then the purchase price shall upon each such issuance be adjusted to a price equal to the Subsequent Offering Price and the Company shall promptly thereafter issue additional shares to the Subscriber to reflect the Subsequent Offering Price.  The Company also issued 147,059 shares of subscribed common stock at $0.17 per share for an aggregate of $25,000 pursuant to a vendor agreement.

In May 2008, the Company issued 555,883 shares of subscribed common stock at $0.17 per share and 277,942 warrants at $0.22 per share for aggregate proceeds of $94,500.  For a period of one hundred and twenty (120) days following the closing date of the offering, in the event the Company, should sell any additional shares of its common stock in an equity financing transaction subsequent to the closing of the offering at a price per share less than the purchase price (the “Subsequent Offering Price”), then the purchase price shall upon each such issuance be adjusted to a price equal to the Subsequent Offering Price and the Company shall promptly thereafter issue additional shares to the Subscriber to reflect the Subsequent Offering Price.   The Company also issued 60,000 shares of subscribed common stock for an aggregate of $7,200 at $0.12 per share pursuant to a vendor agreement.
 
 
 
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In June 2008, the Company reversed 276,815 shares of subscribed common stock at a range of $0.114 to $0.2755 per share for an aggregate of $44,873 pursuant to a vendor settlement agreement.  The Company also issued 58,125 shares of subscribed common stock at $0.08551 per share for an aggregate of $4,970 pursuant to the company’s directors’ compensation agreement.

In August 2008, the Company issued an additional 88,230 shares of subscribed common stock under a revised purchase agreement which revalued the stock at $0.17 per share, down from $0.20 per share in the original agreement.

In September 2008, the Company issued 58,125 shares of subscribed common stock at $0.1045 per share for an aggregate of $6,074 pursuant to the Company’s directors’ compensation agreement.

In November 2008, 3,664,792 shares of subscribed common stock, at a range of $0.105 to $0.19 per share were issued as common stock with a par value of $3,665 and a subscribed total value of $409,666.

In December 2008, the Company issued 58,125 shares of subscribed common stock at $0.019 per share for an aggregate value of $1,104 pursuant to the Company’s directors’ compensation agreement.

In January 2009 the Company reversed 46,500 shares of subscribed common stock at a range of $0.019 to $0.1805 per share for an aggregate of $4,527 pursuant to the Company’s directors’ compensation agreement.

In January 2009 60,000 shares of subscribed common stock at $0.12 per share were issued as common stock with a par value of $60 and a subscribed value of $7,200.

In February 2009, the Company issued 200,000 shares of subscribed common stock at $0.14 per share for a value of $28,000 pursuant to a consulting agreement.

In March 2009, the Company issued 325,000 shares of subscribed common stock at $0.10 per share for a value of $32,500 pursuant to two consulting agreements.

In April 2009, the Company issued 15,000 shares of subscribed common stock at $0.09 per share for a value of $1,350 pursuant to a consulting agreement.

12.
Related Party Transactions

As of June 30, 2009 and 2008, the Company is paying a fee of $1,083 and $3,211 per month to EGB Advisors, LLC. EGB Advisors, LLC is owned solely by William J. Garner, M.D. Chief Executive Officer of the Company.  The fees are for rent, telephone and other office services which are based on estimated fair market value.  As of June 30, 2009 and 2008, Dr. Garner and EGB Advisors, LLC were owed $6,007 and $0, respectively. From the inception of the Company to June 30, 2009 and 2008, respectively, the Company has paid $190,530 and $175,428 to these related parties.

Several stockholders provided consulting services and were paid $174,208 and $171,708 for those services from the inception of the Company to June 30, 2009 and 2008, respectively.  As of June 30, 2009 and 2008, respectively, $456 and $456 was owed to these consultants.

As of June 30, 2009 and 2008, the Company’s former legal counsel in Canada was owed $67,169 and $67,169, respectively.  From the inception of the Company to June 30, 2009 and 2008, the Company paid $78,299 and $78,299, respectively, for legal expenses to the related party stockholders’ company.

As of June 30, 2009 and 2008, the Company’s legal counsel was owed $102,861 and $102,861, respectively. From the inception of the Company to June 30, 2009 and 2008, the Company paid $173,325 and $173,325, respectively, for legal expenses to the related party stockholder’s company.

 
On August 27, 2007, the Company settled a debt with one of its former legal counsels.  As part of the settlement, the Company paid $15,132 on behalf of Inverseon, Inc.  William J. Garner, M.D., the Chief Executive Officer and a director and Martin E. Shmagin, the Chief Financial Officer and a director are also officers, directors and shareholders in Inverseon, Inc.  On August 22, 2008, Inverseon, Inc. converted its $15,132 receivable to an unsecured promissory note. As of June 30, 2009, $1,559 of accrued interest was due the Company.

 
 
 
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13.  
Commitments and Contingencies

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.
 
14.  
Equity 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 instruments issued as they vest over a service period.

The Company assumed the outstanding stock options and plans of its predecessor, Valentis, at the time of the Merger, July 13, 2007, and has continued to record stock-based compensation expense for those options as they have vested.  There have not been any exercises nor any new awards under these prior plans.  There were 1,034 and 6,875 unvested options as of June 30, 2009 and 2008 respectively.  These options expire after 10 years or 90 days after termination of service (1 year after termination of service for the Non-Employee Directors Plan) and are expected to fully vest or expire by June 30, 2010. The amount of income (expense) recorded due to the expiration (vesting) of options totaled approximately $40,000 and ($30,000) during fiscal 2009 and 2008 respectively, and is expected to remain immaterial in future periods.
 
The following tables set forth information as of June 30, 2009 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
  
Weighted-average exercise
Number of securities remaining
  
   
issued upon exercise of
  
price of outstanding
    
available for future issuance
  
   
outstanding options, and
  
options, and
    
under equity compensation plans
  
   
restricted stock awards
    
restricted stock awards
  
(excluding securities
  
                   
reflected in column (a))
  
   
(a)
    
(b)
    
(c)
  
Prior Equity compensation plans approved by security holders
1,348,180
     $
5.81
      
2,820,010
  
                         
 
                                                 
Plan Name
  
Reserved Shares
    
Active Plan Shares
    
Inactive Plan Shares
    
Options Outstanding
Weighted Avg.
Weighted Avg. Contractual Term (yrs.)
1997 Equity Incentive Plan (active)
    
3,593,190
      
3,593,190
              
1,302,180
    
$
5.95
      
5.14
  
1998 Non-Employee Directors Stock Option Plan (active)
    
575,000
      
575,000
              
46,000
    
$
1.87
      
5.35
  
2001 Nonstatutory Incentive Plan (inactive)
    
690,000
              
690,000
                          
2003 401 K Reserve (inactive)
    
159,219
              
159,219
                          
2003 Employee Stock Purchase Plan (inactive)
    
515,500
              
515,500
                          
401k Plan (inactive)
    
1,060
              
1,060
                          
Genemedicine 1993 Stock Option Plan (expired)
    
37,141
              
37,141
                          
Other Stock Options (expired)
    
2,564
              
2,564
                          
Total
    
5,573,674
      
4,168,190
      
1,405,484
      
1,348,180
                  
 
                         
Period reconciliation
  
Shares
    
Weighted Avg.
Exercise
Price
    
Weighted Avg.
Contractual Term (yrs.)
  
Options outstanding as of 6/30/2008
    
1,387,428
    
$
6.06
      
6.12
  
Expired/forfeited
    
(39,248)
    
$
12.46
          
Outstanding options, 6/30/2009
    
1,348,180
    
$
5.81
      
5.15
  
Options vested and exercisable, 6/30/2009
    
1,347,146
    
$
5.81
      
5.15
  
Options vested and expected to vest, 06/30/2009      1,348,180     $  5.81       5.15  
                         
 

Stock Option Plan Descriptions:

The 1997 Equity Incentive Plan, as amended and restated in December 2005 (the “Incentive Plan”), provides for grants of stock options and awards to employees, directors and consultants of the Company. The exercise price of options granted under the Incentive Plan is determined by the Board of Directors but cannot be less than 100% of the fair market value of the common stock on the date of the grant. Generally, options under the Incentive Plan vest 25% one year after the date of grant and on a pro rata basis over the following 36 months and expire upon the earlier of ten years after the date of grant or 90 days after termination of employment. Options granted under the Incentive Plan cannot be repriced without the prior approval of the Company’s stockholders. As of June 30, 2009, an aggregate of 3.6 million shares have been authorized for issuance and options to purchase approximately 1.3 million shares of common stock had been granted and remain outstanding under the Incentive Plan.

Pursuant to the terms of the 1998 Non-Employee Directors’ Plan, as amended and restated in December 2004 (the “Director’s Plan”), each non-employee director, other than a non-employee director who currently serves on the Board of Directors, automatically shall be granted, upon his or her initial election or appointment as a non-employee director, an option to purchase 26,000 shares of common stock, and each person who is serving as a non-employee director on the day following each Annual Meeting of Stockholders automatically shall be granted an option to purchase 10,000 shares of common stock. Generally, options under the 1998 Non-Employee Directors’ Plan vest monthly over 4 years and expire upon the earlier of ten years after the date of grant or one year after termination of service. As of June 30, 2009, an aggregate of 575,000 shares have been authorized for issuance under the Directors’ Plan, and options to purchase approximately 46,000 shares of common stock had been granted and remain outstanding to non-employee directors under the Directors’ Plan.
 
 
 
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Two restricted stock awards (“RSAs”) for a total of 1,300,000 shares were granted to two employees in fiscal 2008, outside of a predefined plan.  These awards vest over four years with a one year cliff. The restrictions on these awards are related to the vesting period and to the unregistered nature of the underlying shares.  The Company assumes a 5% forfeiture rate.  The accounting for these awards under FAS123R is presented in tabular format below.  In November 2008, the Company issued all shares under this plan and approved early vesting of these shares.  During the year ended June 30, 2009 and 2008, the Company recognized stock-based compensation expense for these RSAs of $120,349 and $20,462, respectively.

Non-Vested Shares
  
Number of
    
Weighted Average ("WA")
Total Fair Value Shares Vested
WA Remaing Vesting
  
   
Shares
    
Grant Date Fair Value
      
Period (years)
  
Outstanding Non-vested Shares, at 6/30/2007
    
-
                          
     Non-vested Shares granted
    
1,300,000
    
$
0.11
    
$
-
      
-
  
     Vested Shares
    
-
      
-
    
$
-
      
-
  
     Non-vested Shares forfeited
    
-
      
-
    
$
-
      
-
  
Outstanding Non-vested shares, at 6/30/08
    
1,300,000
    
$
0.11
    
$
-
      
3.27
  
     Non-vested Shares granted
    
-
    
$
-
    
$
-
      
-
  
     Vested Shares
    
1,300,000
      
0.11
    
$
143,000
      
-
  
     Non-vested Shares forfeited
    
-
      
-
    
$
-
      
-
  
     Outstanding Non-vested shares, at 6/30/09
    
-
    
$
-
    
$
-
      
-
  
Total Unrecognized Compensation Cost for Non-vested Shares at 6/30/08:
$
101,055
                          
Total Unrecognized Compensation Cost for Non-vested Shares at 6/30/09:
$
-
                          
                                 
                                 
  
15.  
Warrants

The following tables set forth information as of June 30, 2009 with respect to the Company’s outstanding warrants:
 
         
Weighted
    
   
Common
    
Average
    
   
Share
    
Exercise
    
   
Warrants
    
Price
  
Expiration
June 2005 Private Placement
     903,000     $ 3.49  
June 2010
                   
March 2006 Private Placement
     1,072,500     $ 3.00  
March 2011
                   
2006 Swiss Banker Warrants
     100,000     $ 6.20  
August 2009
                   
2007 Private Placement
     14,000,000     $ 0.125  
August 2012
                   
2008 Private Placement
     935,290     $ 0.22  
January - May 2013
                   
Total       17,010,790     $   0.53    
 
On January 31, 2008 the Company entered into an agreement with Redington Inc. to provide investor relations services.   The number of warrants to be issued Redington Inc. is contingent upon the increase in value of the Company’s stock from an initial closing price of $0.12 per share on January 31, 2008 with a maximum number of approximately 1 million warrants possibly issuable under the agreement. As of June 30, 2009, no warrants have been earned or issued under this agreement.
  
16.  Fair Value Measurements

Effective July 1, 2008, the Company adopted SFAS No. 157 which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

·
Level 1 —Quoted prices in active markets for identical assets or liabilities.

 
 
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·
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
·
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar valuation techniques that use significant unobservable inputs.

The Company's adoption of SFAS 157 did not have a material impact on its consolidated financial statements. The Company has segregated all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. FSP FAS 157-2 delayed the effective date for all nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years, except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis.
 
Assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 are summarized below:
 
   
Level 1
    
Level 2
    
Total
  
Assets:
                  
    Cash
   $ 2,805     $ -     $ 2,805  
                         
Liabilities:
                        
    Series B Convertible Preferred Stock,     unregistered portion classified as a liability
   $ -     $ 709,200     $ 709,200  

17.  Subsequent Events

The Company’s management has evaluated and disclosed subsequent events from the balance sheet date of June 30, 2009 through September 23, 2009, the day before the date that these financial statements were filed with the Securities and Exchange Commission in this Annual Report on Form 10-K.

On July 7, 2009, the Company entered into an unsecured promissory note with C. Lowell Parsons, M.D. a director of the Company, in the amount of $15,000. 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 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The note is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two (2) calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  
 
On July 21, 2009, the Company entered into an unsecured promissory note with C. Lowell Parsons, M.D. a director of the Company, in the amount of $30,000. 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 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000.  The note is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two (2) calendar years from the note issuance date.  The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty.  
 
On July 21, 2009, Benjamin F. McGraw, III tendered his resignation as a member of the Board of Directors of Urigen Pharmaceuticals, Inc. effective immediately. There were no disagreements with the Company that led to Mr. McGraw’s resignation.

On August 13, 2009, Urigen Pharmaceuticals, Inc. entered into an Amendment No.2 (the “Amendment No. 2”) to the note purchase agreement dated as of January 9, 2009 with Platinum-Montaur Life Science, LLC. Pursuant to the Amendment No. 2 the Company issued a 10% senior secured convertible promissory note in the principal amount of $202,500. The note matures on October 9, 2009. The terms of the note are the same as the Note issued by the Company pursuant to the purchase agreement on January 9, 2009. (See Note 5)

On August 24, 2009, Urigen, N.A., Inc. the wholly owned subsidiary of Urigen Pharmaceuticals, Inc., entered into Amendment No.3 to the certain License Agreement effective June 6, 2004 between Urigen N.A and the Regents of the University of California for the agreement described in Note 3. Pursuant to the terms of the Amendment, the license maintenance fees were amended to provide for future payments as follows:

A.  
$20,000 on June 6, 2010,
 

B.  
$25,000 on June 6, 2011 and annually thereafter on each anniversary; provided however that the Company’s obligation to pay license maintenance fees will end on the date the Company is commercially selling the licensed product.

The amendment provides that as partial consideration and in lieu of cash for license maintenance fees that were due on May 6, 2009 and June 6, 2009, the Company shall issue 250,000 shares of its common stock to the University. The acceptance of the shares is subject to the final approval of the Office of the President of the University.
 
 
 
 
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18. 
Quarterly Financial Information (UNAUDITED)
 
   
Quarter
  
   
First
    
Second
    
Third
    
Fourth
  
   
(in thousands, except per share data)
  
2009
                                
Revenue
  
$
―
    
$
―
    
$
―
    
$
―
  
Total operating expenses
    
(530
)
    
(454
)
    
(288
)
    
(533
)
Total other income (expenses), net
    
68
      
23
      
(508
)
    
(35
)
Net loss
    
(462
)
    
(431
)
    
(796
)
    
(568
)
Net loss attributable to common stockholders       (488 )       (457 )       (1,002 )       (585 ) 
Basic and diluted net loss per share
  
$
(0.01
)
  
 $
(0.01
)
  
$ 
(0.01
)
  
$ 
(0.01
)
2008
                                
Revenue
  
$
―
    
$
―
    
$
―
    
$
―
  
Total operating expenses
    
(1,209
)
    
(1,040
)
    
(827
)
    
(634
)
Total other income (expenses), net
    
(2,117
)
    
1,035
      
50
      
(102
)
Net loss
    
(3,326
)
    
(5
)
    
(777
)
    
(736
)
Basic and diluted net loss per share
  
$ 
(0.05
)
  
$ 
(0.00
)
  
$ 
(0.01
)
  
 $
(0.01
)
                                 
                                 

 
75