form10a-q.htm
NOVABAY
PHARMACEUTICALS, 3rd QUARTER 10-Q/A
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
Amendment
No. 1
(Mark
One)
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x
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended September 30, 2008
OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
to
Commission
file number: 001-33678
NOVABAY PHARMACEUTICALS,
INC.
(Exact
name of registrant as specified in its charter)
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California
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68-0454536
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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5980
Horton Street, Suite 550, Emeryville, CA 94608
(Address
of principal executive office) (Zip Code)
(510)
899-8800
(Registrant’s
telephone number, including area code)
Not
applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the
Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days. Yes No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a
smaller
reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer (Do not check if a smaller reporting company)
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes No x
As of
October 31, 2008, 21,468,574 shares of the registrant’s common stock, $0.01 par
value, were outstanding.
NOVABAY PHARMACEUTICALS, INC.
QUARTERLY
REPORT ON FORM 10-Q
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Page
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ITEM 1.
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3
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3 |
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4
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5 |
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6 |
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ITEM 2.
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22 |
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ITEM 3.
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32 |
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ITEM 4T.
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32 |
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ITEM 1.
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33 |
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ITEM 1A.
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33 |
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ITEM 2.
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53 |
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ITEM 3.
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53 |
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ITEM 4.
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53 |
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ITEM 5.
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53 |
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ITEM 6.
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54 |
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55 |
EXPLANATORY
NOTE
This
Amendment No. 1 on Form 10-Q/A (this “Amendment”) amends our quarterly report on
Form 10-Q for the fiscal quarter ended September 30, 2008 as filed with the
Securities and Exchange Commission on November 14, 2008, and is being filed
solely to amend the Table of Contents, in order to correct a typographical
error.
This
Amendment contains the complete text of the original report with the corrected
information appearing in the Table of Contents.
NOVABAY
PHARMACEUTICALS, INC
(formerly
NovaCal Pharmaceuticals Inc. )
(a
developmental stage company)
(in
thousands, except per share data)
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September
30,
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December
31,
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2008
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2007
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(unaudited)
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$ |
11,739 |
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$ |
10,941 |
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Short-term
investments
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3,463 |
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11,412 |
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Prepaid
expenses and other current assets
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773 |
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419 |
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Total
current assets
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15,975 |
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22,772 |
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Property
and equipment, net
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1,449 |
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1,150 |
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TOTAL
ASSETS
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$ |
17,424 |
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$ |
23,922 |
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Liabilities:
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Current
liabilities:
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Accounts
payable
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$ |
457 |
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$ |
142 |
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Accrued
liabilities
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1,350 |
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1,141 |
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Capital
lease obligation
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40 |
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37 |
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Equipment
loan
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357 |
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219 |
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Deferred
revenue
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3,468 |
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3,039 |
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Total
current liabilities
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5,672 |
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4,578 |
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Capital
lease obligation - non-current
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18 |
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49 |
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Equipment
loan - non-current
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565 |
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497 |
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Deferred
revenue - non-current
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2,539 |
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4,478 |
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Total
liabilities
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8,794 |
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9,602 |
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Stockholders'
Equity:
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Common
stock, $0.01 par value; 65,000 and 65,000 shares authorized at September
30, 2008 and December 31, 2007, respectively, 21,457 and 21,269 shares
issued and outstanding at September 30, 2008 and December 31, 2007,
respectively
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214 |
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212 |
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Additional
paid-in capital
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33,437 |
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32,585 |
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Accumulated
other comprehensive income (loss)
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31 |
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(3 |
) |
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Accumulated
deficit during development stage
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(25,052 |
) |
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(18,474 |
) |
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Total
stockholders' equity
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8,630 |
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14,320 |
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
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$ |
17,424 |
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$ |
23,922 |
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The
accompanying notes are an integral part of these consolidated financial
statements.
NOVABAY
PHARMACEUTICALS, INC
(formerly
NovaCal Pharmaceuticals Inc. )
(a
developmental stage company)
(in
thousands, except per share data
(unaudited)
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Three
Months Ended September 30,
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Nine
Months Ended September 30,
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Cumulative
Period from July 1, 2002 (date of development
stage inception)
to September 30,
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2008
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2007
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2008
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2007
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2008
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REVENUE
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License
and collaboration revenue
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$ |
1,592 |
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$ |
1,444 |
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$ |
4,526 |
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$ |
4,392 |
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$ |
11,972 |
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Total
revenue
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1,592 |
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1,444 |
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4,526 |
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4,392 |
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11,972 |
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EXPENSES
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Operating
Expenses:
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Research
and development
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1,443 |
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2,051 |
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6,263 |
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5,580 |
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21,675 |
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General
and administrative
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1,715 |
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1,021 |
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5,173 |
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3,125 |
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16,501 |
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Total
operating expenses
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3,158 |
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3,072 |
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11,436 |
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8,705 |
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38,176 |
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Other
income, net
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77 |
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72 |
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334 |
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|
307 |
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1,166 |
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Net
loss before income taxes
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(1,489 |
) |
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(1,556 |
) |
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(6,576 |
) |
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(4,006 |
) |
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(25,038 |
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Provision
for income taxes
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- |
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- |
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(2 |
) |
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- |
|
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|
(14 |
) |
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Net
loss
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$ |
(1,489 |
) |
|
$ |
(1,556 |
) |
|
$ |
(6,578 |
) |
|
$ |
(4,006 |
) |
|
$ |
(25,052 |
) |
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Net
loss per share:
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Basic
and diluted
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$ |
(0.07 |
) |
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$ |
(0.24 |
) |
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$ |
(0.31 |
) |
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$ |
(0.62 |
) |
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Shares
used in per share calculations:
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Basic
and diluted
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21,443 |
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6,564 |
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21,313 |
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6,494 |
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The
accompanying notes are an integral part of these consolidated financial
statements
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NOVABAY
PHARMACEUTICALS, INC.
(formerly
NovaCal Pharmaceuticals, Inc.)
(a
development stage company)
(in
thousands)
(unaudited)
|
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|
Nine
Months Ended September 30,
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Cumulative
Period from July 1, 2002 (date of development stage inception) to
September 30,
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2008
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2007
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2008
|
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Cash
flows from operating activities:
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Net
loss
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$ |
(6,578 |
) |
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$ |
4,006 |
) |
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$ |
(25,052 |
) |
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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Depreciation
and amortization
|
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222 |
|
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128 |
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|
622 |
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Accretion
of discount on short-term investments
|
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(40 |
) |
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|
(81 |
) |
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|
(318 |
) |
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Net
realized (gain) loss on sales of short-term investments
|
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(4 |
) |
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|
(88 |
) |
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28 |
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Loss
on disposal of property and equipment
|
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|
- |
|
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|
- |
|
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|
121 |
|
|
Stock-based
compensation expense for options issued to employees and
directors
|
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|
667 |
|
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|
287 |
|
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|
1,408 |
|
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Compensation
expense for warrants issued for services
|
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44 |
|
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|
- |
|
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44 |
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Stock-based
compensation expense for options and stock issued to
non-employees
|
|
|
(9 |
) |
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|
130 |
|
|
|
354 |
|
|
Taxes
paid by LLC
|
|
|
|
|
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|
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|
1 |
|
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Changes
in operating assets and liabilities:
|
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|
|
|
|
|
|
|
|
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Decrease
in prepaid expenses and other assets
|
|
|
(354 |
) |
|
|
(138 |
) |
|
|
(768 |
) |
|
Increase
in accounts payable and accrued liabilities
|
|
|
524 |
|
|
|
992 |
|
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|
1,832 |
|
|
(Increase)
decrease in deferred revenue
|
|
|
(1,510 |
) |
|
|
(839 |
) |
|
|
6,007
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(7,038 |
) |
|
|
(3,615 |
) |
|
|
(15,721 |
) |
|
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|
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|
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Cash
flows from investing activities:
|
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Purchases
of property and equipment
|
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|
(521 |
) |
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|
(371 |
) |
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|
(2,071 |
) |
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Proceeds
from disposal of property and equipment
|
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|
- |
|
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|
1 |
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|
44 |
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Purchases
of short-term investments
|
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|
(32,103 |
) |
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|
(30,028 |
) |
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|
(94,550 |
) |
|
Proceeds
from maturities and sales of short-term investments
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|
40,129 |
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|
30,200 |
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|
91,405 |
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Cash
acquired in purchase of LLC
|
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|
- |
|
|
|
- |
|
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|
516 |
|
|
Net
cash provided by (used in) investing activities
|
|
|
7,505 |
|
|
|
(198 |
) |
|
|
(4,656 |
) |
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|
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|
|
|
|
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Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
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|
Proceeds
from preferred stock issuances, net
|
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|
- |
|
|
|
- |
|
|
|
11,160 |
|
|
Proceeds
from common stock issuances
|
|
|
- |
|
|
|
- |
|
|
|
17 |
|
|
Proceeds
from exercise of options and warrants
|
|
|
153 |
|
|
|
99 |
|
|
|
1,761 |
|
|
Initial
public offering costs
|
|
|
- |
|
|
|
(926 |
) |
|
|
17,077 |
|
|
Proceeds
from stock subscription receivable
|
|
|
- |
|
|
|
- |
|
|
|
873 |
|
|
Proceeds
from issuance of notes
|
|
|
- |
|
|
|
- |
|
|
|
405 |
|
|
Principal
payments on capital lease
|
|
|
(28 |
) |
|
|
(22 |
) |
|
|
(99 |
) |
|
Proceeds
from borrowings under equipment loan
|
|
|
422 |
|
|
|
494 |
|
|
|
1,216 |
|
|
Principal
payments on equipment loan
|
|
|
(216 |
) |
|
|
(46 |
) |
|
|
(294 |
) |
|
Tax
benefit from stock plans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net
cash provided by (used in) financing activities
|
|
|
331 |
|
|
|
(401 |
) |
|
|
32,116 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
798 |
|
|
|
(4,214 |
) |
|
|
11,739 |
|
|
Cash
and cash equivalents, beginning of period
|
|
|
10,941 |
|
|
|
4,903 |
|
|
|
- |
|
|
Cash
and cash equivalents, end of period
|
|
$ |
11,739 |
|
|
$ |
689 |
|
|
$ |
11,739 |
|
The
accompanying notes are an integral part of these consolidated financial
statements
NOVABAY
PHARMACEUTICALS, INC.
(formerly
NovaCal Pharmaceuticals, Inc.)
(a
development stage company)
NOTE
1. ORGANIZATION
NovaBay
Pharmaceuticals, Inc. (the “Company”) is a clinical stage biopharmaceutical
company focused on developing innovative non-antibiotic, antimicrobial product
candidates for the treatment or prevention of a wide range of infections in
hospital and non-hospital environments. Many of these infections have become
increasingly difficult to treat because of the rapid rise in drug resistance. We
have discovered and are developing a class of non-antibiotic anti-infective
compounds, which we have named Aganocide compounds. These compounds are based
upon small molecules that are naturally generated by white blood cells when
defending the body against invading pathogens. We believe that our Aganocide
compounds could form a platform on which to create a variety of products to
address differing needs in the treatment and prevention of bacterial and viral
infections. In laboratory testing, our Aganocide compounds have demonstrated the
ability to destroy all bacteria against which they have been tested.
Furthermore, because of their mechanism of action, we believe that bacteria are
unlikely to develop resistance to our Aganocide compounds.
We were incorporated under
the laws of the State of California on January 19, 2000 as NovaCal Pharmaceuticals,
Inc. We had no operations until July 1, 2002, on which date we acquired all
of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited
liability company. In February 2007, we changed our name from NovaCal
Pharmaceuticals, Inc. to NovaBay Pharmaceuticals, Inc. In August 2007, we formed
two subsidiaries—NovaBay Pharmaceuticals Canada, Inc., a wholly-owned subsidiary
incorporated under the laws of British Columbia (Canada), which may conduct
research and development in Canada, and DermaBay, Inc., a wholly-owned U.S.
subsidiary, which will explore and pursue dermatological opportunities. We
currently operate in one business
segment.
In
October 2007, we completed an initial public offering of our common stock
(“IPO”) in which we sold and issued 5,000,000 shares of our common stock at a
price to the public of $4.00 per share. We raised a total of $20.0 million from
the IPO, or approximately $17.1 million in net cash proceeds after deducting
underwriting discounts and commissions of $1.4 million and other offering costs of $1.5 million. Upon the closing
of the IPO, all shares of convertible preferred stock outstanding automatically
converted into 9,613,554 shares of common stock. In connection with the IPO, we
also issued warrants to the underwriters to purchase an aggregate of
350,000 shares of common stock at an exercise price of $4.00 per share. The
warrants are exercisable on or after October 31, 2008 and expire on
October 31, 2010.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
interim financial statements for the three and nine months ended September 30,
2008 and 2007 and the cumulative period from July 1, 2002 to September 30,
2008 are unaudited. The unaudited interim financial statements have been
prepared on the same basis as the audited annual financial statements and, in
our opinion, reflect all adjustments necessary for a fair statement of our
financial position, results of operations and cash flows. The results for the
three and nine months ended September 30, 2008 are not necessarily indicative of
the expected results for the year ended December 31, 2008. The consolidated
financial statements include our accounts and the accounts of our wholly owned
subsidiaries.
Intercompany
transactions and balances have been eliminated. The accompanying consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”) and are
expressed in U.S. dollars. The financial statements have been prepared under the
guidelines of Statement of Financial Accounting Standard (“SFAS”) No. 7,
“Accounting and Reporting by Development Stage Enterprises”. A development stage
enterprise is one in which planned principal operations have not commenced, or
if its operations have commenced, there have been no significant revenues
therefrom. As of September 30, 2008 we had not commenced our planned principal
operations.
Certain amounts for prior
periods have been reclassified to conform to current period
presentation.
Principles
of Consolidation
The accompanying
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, NovaBay Pharmaceuticals Canada, Inc. and DermaBay,
Inc. All inter-company accounts and transactions have been eliminated in
consolidation.
Reverse
Stock Split
On
August 10, 2007, we filed an amendment to our articles of incorporation to
effect a 1-for-2 reverse stock split of our common stock. All
share and per share amounts relating to the common stock, stock options and
warrants and the conversion ratios of preferred stock included in the
financial statements and footnotes have been restated to reflect the
reverse
stock split.
Use
of Estimates
The
preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents and Short-Term Investments
We
consider all highly liquid instruments with a stated maturity of three months or
less to be cash and cash equivalents. Cash and cash equivalents are stated at
cost, which approximate their fair value. As of September 30, 2008, our cash and
cash equivalents were held in financial institutions in the United States and
include deposits in money market funds, which were unrestricted as to withdrawal
or use.
We
classify all highly liquid investments with a stated maturity of greater than
three months as short-term investments. Short-term investments generally consist
of United States government, municipal and corporate debt securities. We have
classified our short-term investments as available-for-sale. We do not intend to
hold securities with stated maturities greater than twelve months
until maturity. In response to changes in the availability of and the yield on
alternative investments as well as liquidity requirements, we occasionally sell
these securities prior to their stated maturities. These securities are carried
at fair value, with the unrealized gains and losses reported as a component of
other comprehensive income (loss) until realized. Realized gains and losses from
the sale of available-for-sale securities, if any, are determined on a specific
identification basis. A decline in the market value below cost of any
available-for-sale security that is determined to be other than temporary
results in a revaluation of its carrying amount to fair value and an impairment
charge to earnings, resulting in a new cost basis for the security. No such
impairment charges were recorded for the periods presented. Premiums and
discounts are amortized or accreted over the life of the related security as an
adjustment to yield using the straight-line method. The amortization and
accretion, interest income and realized gains and losses are included in other
income, net within the consolidated statements of operations. Interest income is
recognized when earned.
Concentrations
of Credit Risk
Financial
instruments which potentially subject us to significant concentrations of credit
risk consist primarily of cash and cash equivalents and short-term investments.
We maintain deposits of cash, cash equivalents and short-term investments with
three highly-rated, major financial institutions in the United
States.
Deposits
in these banks may exceed the amount of federal insurance provided on such
deposits. We do not believe we are
exposed to significant credit risk due to the financial position of the
financial institutions in which these deposits are held. Additionally, we have
established guidelines regarding diversification and investment maturities,
which are designed to maintain safety and
liquidity.
Fair
Value of Financial Instruments
Financial
instruments, including cash and cash equivalents, accounts payable and accrued
liabilities are carried at cost, which management believes approximates fair
value due to the short-term nature of these instruments. The fair value of
capital lease obligations and equipment loans approximates its carrying amounts
as a market rate of interest is attached to their repayment.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is calculated
using the straight-line method over the estimated useful lives of the related
assets of five to seven years for office
and laboratory equipment, three years for software and seven years for furniture
and fixtures. Leasehold improvements are depreciated on the shorter of seven
years or the life of the lease term. Depreciation of assets recorded under
capital leases is included in depreciation expense. The
costs of normal maintenance, repairs, and minor replacements are charged to
operations when incurred.
Impairment
of Long-Lived Assets
We
account for long-lived assets in accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal
of Long-Lived Assets and for Long-Lived Assets to be Disposed of”, which
requires that companies consider whether events or changes in facts and
circumstances, both internally and externally, may indicate that an impairment
of long-lived assets held for use are present. Management periodically evaluates
the carrying value of long-lived assets and has determined that there was no
impairment as of all periods presented. Should there be impairment in the
future, we would recognize the amount of the impairment based on the expected
future cash flows from the impaired assets. The cash flow estimates would be
based on management’s best estimates, using appropriate and customary
assumptions and projections at the time.
Accumulated
Other Comprehensive Income
Accumulated
other comprehensive income consists of unrealized gains and losses on short-term
investments classified as available-for-sale.
Revenue
Recognition
License
and collaboration revenue is primarily generated through agreements with
strategic partners for the development and commercialization of our product
candidates. The terms of the agreements typically include non-refundable upfront
fees, funding of research and development activities, payments based upon
achievement of certain milestones and royalties on net product sales. In
accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue
Arrangements with Multiple Deliverables”, we analyze our multiple element
arrangements to determine whether the elements can be separated. We perform our
analysis at the inception of the arrangement and as each product or service is
delivered. If a product or service is not separable, the combined deliverables
are accounted for as a single unit of accounting and recognized over the
performance obligation period.
We recognize revenue in
accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, “Revenue
Recognition in Financial Statements”, as amended by SAB No. 104 (together,
“SAB 104”). In accordance with SAB 104, revenue is recognized when the following
criteria have been met: persuasive evidence of an arrangement exists; delivery
has occurred and risk of loss has passed; the seller’s price to the buyer is
fixed or determinable; and collectibility is reasonably
assured.
Assuming
the elements meet the EITF No. 00-21 criteria for separation and the SAB 104
requirements for recognition, the revenue recognition methodology prescribed for
each unit of accounting is summarized below:
Upfront
Fees—We
defer recognition of non-refundable upfront fees if we have continuing
performance obligations without which the technology licensed has no utility to
the licensee. If we have continuing involvement through research and development
services that are required because our know-how and expertise related to the
technology is proprietary to us, or can only be performed by us, then such
up-front fees are deferred and recognized over the period of continuing
involvement.
Funded
Research and Development—Revenue from research and development services
is recognized during the period in which the services are performed and is based
upon the number of full-time-equivalent personnel working on the specific
project at the agreed-upon rate. Reimbursements from collaborative partners for
agreed upon direct costs including direct materials and outsourced, or
subcontracted, pre-clinical studies are classified as revenue in accordance with
EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as
an Agent,” and recognized in the period the reimbursable expenses are incurred.
Payments received in advance are recorded as deferred revenue until the research
and development services are performed or costs are
incurred.
Milestones—Substantive
milestone payments are considered to be performance bonuses that are recognized
upon achievement of the milestone only if all of the following conditions are
met: the milestone payments are non-refundable; achievement of the milestone
involves a degree of risk and was not reasonably assured at the inception of the
arrangement; substantive effort is involved in achieving the milestone; the
amount of the milestone is reasonable in relation to the effort expended or the
risk associated with achievement of the milestone; and a reasonable amount of
time passes between the up-front license payment and the first milestone payment
as well as between each subsequent milestone payment. If any of these conditions
are not met, the milestone payments are deferred and recognized as revenue over
the term of the arrangement as we complete our performance
obligations.
Royalties—We
recognize royalty revenues from licensed products upon the sale of the related
products.
Advertising
Costs
There were no
advertising costs incurred for any of the periods
presented.
Research
and Development Costs
We charge research and
development costs to expense as incurred. These costs include salaries and
benefits for research and development personnel, costs associated with clinical
trials managed by contract research organizations, and other costs associated
with research, development and regulatory activities. We use external service
providers to conduct clinical trials, to manufacture supplies of product
candidates and to provide various other research and development-related
products and services.
Patent
Costs
We
expense patent costs, including legal expenses, in the period in which they are
incurred. Patent expenses are included as general and administrative expenses in
our statements of operations.
Stock-Based
Compensation
On
January 1, 2006, we adopted the fair value recognition provisions of SFAS
No. 123R, “Share-Based Payment”. SFAS No. 123R replaced SFAS
No. 123 and superseded Accounting Principles Board (“APB”) Opinion
No. 25,
“Accounting
for Stock Issued to Employees” and related interpretations. Under the fair value
recognition provisions of SFAS
No. 123R, stock-based compensation expense is measured at the grant date
for all stock-based awards to employees and directors and is recognized as
expense over the requisite service period, which is generally the vesting
period. We were required to utilize the prospective application method
prescribed by SFAS No. 123R, under which prior periods are not revised for
comparative purposes. Under the prospective application transition method,
non-public entities that previously used the minimum value method of SFAS
No. 123 should continue to account for non-vested equity awards outstanding
at the date of adoption of SFAS No. 123R in the same manner as they had
been accounted for prior to adoption. SFAS No. 123R specifically prohibits
pro forma disclosures for those awards valued using the minimum value
method.
The
valuation and recognition provisions of SFAS No. 123R apply to new awards
and to awards outstanding as of the adoption date that are subsequently
modified. The adoption of SFAS No. 123R had a material effect on our
financial position and results of operations. See Note 10 for further
information regarding stock-based compensation expense and the assumptions used
in estimating that expense.
Prior to
the adoption of SFAS No. 123R, we valued our stock-based awards using the
minimum value method and provided pro-forma information regarding stock-based
compensation and net income required by SFAS No. 123. We did not recognize
stock-based compensation expense in our statements of operations for option
grants to our employees or directors for the periods prior to our adoption of
SFAS No. 123R because the exercise price of options granted was generally
equal to
the fair market value of the underlying common stock on the date of
grant.
We
account for stock compensation arrangements with non-employees in accordance
with SFAS No. 123R and EITF
Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services”, which require that such equity instruments are recorded at their fair
value on the measurement date. The measurement of stock-based compensation is
subject to periodic adjustment as the underlying equity instruments vest.
Non-employee stock-based compensation charges are amortized over the vesting
period on a straight-line basis. For stock options granted to non-employees, the
fair value of the stock options is estimated using a Black-Scholes-Merton
valuation model.
Income
Taxes
We
account for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is recognized if it is more likely than not that some
portion or all of the deferred tax asset will not be recognized.
Net
Income (Loss) per Share
We
compute net income (loss) per share in accordance with SFAS No. 128,
“Earnings per Share” which requires presentation of both basic and diluted
earnings (loss) per share (“EPS”). Basic EPS is computed by dividing net income
(loss) available to common shareholders (numerator) by the weighted average
number of common shares outstanding (denominator) during the period. Diluted EPS
gives effect to all dilutive potential common shares outstanding during the
period including stock options and stock warrants, using the treasury stock
method, and convertible preferred stock, using the if-converted method. In
computing diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the exercise of
stock options or warrants. Potentially dilutive common share equivalents are
excluded from the diluted EPS computation in net loss periods as their effect
would be anti-dilutive.
Recent
Accounting Pronouncements
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities”. SFAS No. 161 changes the
disclosure requirements for derivative instruments and hedging activities by
requiring enhanced disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” and how derivative instruments and related hedged items affect an
entity’s operating results, financial position, and cash flows.
SFAS
No. 161 is effective for fiscal years beginning after November 15,
2008. Early adoption is permitted. We are currently reviewing the provisions of
SFAS No. 161 and have not yet adopted the statement. However, as the
provisions of SFAS
No. 161 are only related to disclosure of derivative and hedging
activities, we do not believe the adoption of SFAS
No. 161 will have a material impact on our consolidated operating results,
financial position, or cash flows.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets or FSP FAS
142-3. FSP FAS 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. The intent of the position is to improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142
and the period of expected cash flows used to measure the fair value of the
intangible asset. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. We are assessing the potential impact that the adoption
of FSP FAS 142-3 may have on our consolidated financial position, results of
operations or cash flows.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles or SFAS
No. 162. SFAS No. 162 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP. This statement shall be effective 60 days following the
Securities and Exchange Commission’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles. We do not believe
that implementation of this standard will have a material impact on our
consolidated financial position, results of operations or cash
flows.
In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,” (FSP
EITF 03-6-1). FSP EITF 03-6-1 states that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. FSP EITF
03-6-1 is effective for fiscal years beginning after December 15, 2008.
Management has determined that the adoption of FSP EITF 03-6-1 will not have an
impact on the Financial Statements.
NOTE
3. SHORT-TERM INVESTMENTS
Short-term
investments at September 30, 2008 and December 31, 2007 consisted of the
following:
|
|
|
September
30, 2008
|
|
|
(in
thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized/Realized Gains
|
|
|
Gross
Unrealized/
Realized
Losses
|
|
|
Market
Value
|
|
|
Corporate
bonds
|
|
$ |
390 |
|
|
$ |
- |
|
|
$ |
(1 |
) |
|
$ |
389 |
|
|
U.S.
Agencies
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Municipal
Bonds
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Certificates
of Deposit
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Other
Fixed Income
|
|
|
3,070 |
|
|
|
4 |
|
|
|
- |
|
|
|
3,074 |
|
|
|
|
$ |
3,460 |
|
|
$ |
4 |
|
|
$ |
(1 |
) |
|
$ |
3,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
(in
thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized/
Realized Gains
|
|
|
Gross
Unrealized/Realized
Losses
|
|
|
Market
Value
|
|
|
Corporate
bonds
|
|
$ |
5,362 |
|
|
$ |
- |
|
|
$ |
(4 |
) |
|
$ |
5,358 |
|
|
U.S.
Agencies
|
|
|
5,553 |
|
|
|
1 |
|
|
|
- |
|
|
|
5,554 |
|
|
Municipal
Bonds
|
|
|
500 |
|
|
|
- |
|
|
|
- |
|
|
|
500 |
|
|
Certificates
of Deposit
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Other
Fixed Income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
$ |
11,415 |
|
|
$ |
1 |
|
|
$ |
(4 |
) |
|
$ |
11,412 |
|
Contractual
maturities of short-term investments as of September 30, 2008 and
December 31, 2007 were as follows:
|
|
|
September
30, 2008
|
|
|
(in
thousands)
|
|
Amortized
Cost
|
|
|
Market
Value
|
|
|
Due
in one year or less
|
|
$ |
2,985 |
|
|
$ |
2,988 |
|
|
Due
after 10 years
|
|
|
475 |
|
|
|
475 |
|
|
Total
|
|
$ |
3,460 |
|
|
$ |
3,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
Amortized
|
|
|
Market
|
|
|
(in
thousands)
|
|
Cost
|
|
|
Value
|
|
|
Due
in one year or less
|
|
$ |
9,915 |
|
|
$ |
9,912 |
|
|
Due
after 10 years
|
|
|
1,500 |
|
|
|
1,500 |
|
|
Total
|
|
$ |
11,415 |
|
|
$ |
11,412 |
|
We
did not recognize any realized gains or losses for the year ended
December 31, 2007. For the three and nine
months ended September 30, 2008, we had $4,000 of net realized gain. For the
cumulative period from July 1, 2002 (date of development stage inception)
to September 30, 2008, we recognized a net realized loss of
$28,000.
NOTE
4. PROPERTY AND EQUIPMENT
Property and equipment
consisted of the following:
|
(in
thousands)
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
Office
and laboratory equipment
|
|
$ |
1,646 |
|
|
$ |
1,243 |
|
|
Furniture
and fixtures
|
|
|
113 |
|
|
|
96 |
|
|
Software
|
|
|
106 |
|
|
|
72 |
|
|
Leasehold
improvement
|
|
|
140 |
|
|
|
73 |
|
|
Total
property and equipment, at cost
|
|
|
2,005 |
|
|
|
1,484 |
|
|
Less:
accumulated depreciation
|
|
|
(556 |
) |
|
|
(334 |
) |
|
Total
property and equipment, net
|
|
$ |
1,449 |
|
|
$ |
1,150 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $183,000 for the year ended December 31, 2007, $222,400 for the
nine months ended September 30, 2008, and $622,400 for the cumulative period
from July 1, 2002 (date of development stage inception) to
September
30, 2008.
NOTE
5. ACCRUED LIABILITIES
Accrued
liabilities consisted of the following:
|
(in
thousands)
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
Research
and development
|
|
$ |
187 |
|
|
$ |
178 |
|
|
Employee
payroll and benefits
|
|
|
730 |
|
|
|
688 |
|
|
Professional
fees
|
|
|
274 |
|
|
|
197 |
|
|
Other
|
|
|
159 |
|
|
|
78 |
|
|
Total
accrued liabilities
|
|
$ |
1,350 |
|
|
$ |
1,141 |
|
NOTE
6. CAPITAL LEASE OBLIGATION
During
the first quarter of 2007, we commenced a lease for a portion of our laboratory
equipment. This arrangement is being
accounted for as a capital lease. Assets under capital leases that are included
in property and equipment are as follows:
|
(in
thousands)
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
Office
and laboratory equipment
|
|
$ |
229 |
|
|
$ |
166 |
|
|
Less:
accumulated depreciation
|
|
|
(39 |
) |
|
|
(25 |
) |
|
Capital
lease assets, net
|
|
$ |
190 |
|
|
$ |
141 |
|
Future
minimum lease payments under capital leases were as follows at
September 30, 2008:
|
(in
thousands)
|
|
Lease
Commitment
|
|
|
Year
ending December 31,
|
|
|
|
|
2008
|
|
$ |
11 |
|
|
2009
|
|
|
45 |
|
|
2010
|
|
|
7 |
|
|
Total
minimum lease payments
|
|
|
63 |
|
|
Less:
amount representing interest
|
|
|
(5 |
) |
|
Present
value of minimum lease payments
|
|
$ |
58 |
|
NOTE
7. EQUIPMENT LOAN
During
April 2007, we entered into a master security agreement to establish a $1.0
million equipment loan facility with a financial institution. The purpose of
this loan is to finance equipment purchases, principally in the build-out of our
laboratory facilities. Current borrowings under the loan are secured by eligible
equipment purchased from January 2006 through April 2008 and will be repaid over
40 months at an interest rate equal to the greater of 5.94% over the three year
Treasury rate in effect at the time of funding or 10.45%. There are no loan
covenants specified in the agreement.
As of
September 30, 2008, we had an outstanding equipment loan balance of $921,863
carrying a weighted-average interest rate of 10.94%. At September 30, 2008,
there was $216,000 available for borrowing under this equipment loan
facility.
Future
minimum loan payments under equipment loans were as follows at
September 30, 2008:
|
(in
thousands)
|
|
Loan
Commitment
|
|
|
Year
ending December 31:
|
|
|
|
|
2008
|
|
$ |
110 |
|
|
2009
|
|
|
440 |
|
|
2010
|
|
|
396 |
|
|
2011
|
|
|
109 |
|
|
Total
minimum loan payments
|
|
$ |
1,055 |
|
|
Less:
amount representing interest
|
|
|
(133 |
) |
|
Present
value of minimum loan payments
|
|
$ |
922 |
|
NOTE
8. COMMITMENTS AND CONTINGENCIES
Operating
Leases
We lease
laboratory facilities and office space under operating leases which expire at
various dates through 2015. The lease was amended as of August 13,
2008. The changes in the amendment are reflected in the minimum lease
schedule.
Rent
expense was $158,000 and $516,000 for the three and nine months ended September
30, 2008. Rent expense was $130,000 and $393,000 for the three and nine months
ended September 30, 2007 and $1,837,000 for the cumulative period from
July 1, 2002 (date of development stage inception) to September 30,
2008.
The
future minimum lease payments under non-cancellable operating leases for the
next five years were as follows as of September 30, 2008:
|
(in
thousands)
|
|
Lease
Commitment
|
|
|
Year
ending December 31:
|
|
|
|
|
2008
|
|
$ |
216 |
|
|
2009
|
|
|
860 |
|
|
2010
|
|
|
894 |
|
|
2011
|
|
|
929 |
|
|
2012
|
|
|
966 |
|
|
2013
|
|
|
1,005 |
|
|
Total
lease commitment
|
|
$ |
4,870 |
|
Legal
Matters
From
time to time, we may be involved in various legal proceedings arising in the
ordinary course of business.
There
are no matters at September 30, 2008 that, in the opinion of management, would
have a material adverse effect on our financial position, results of operations
or cash flows.
NOTE
9. STOCKHOLDERS’ EQUITY
Preferred
Stock
In 2002
and 2003, we issued 3.2 million shares of Series A Convertible Preferred
Stock for net proceeds of $647,000. In 2003 and 2004, we issued 6.9 million
shares of Series B Convertible Preferred Stock for net proceeds of $3.0 million.
In 2004
and 2005, we issued 6.7 million shares of Series C Convertible Preferred
Stock for net proceeds of $5.4 million. In 2005
and 2006, we issued 2.5 million shares of Series D Convertible Preferred
Stock for net proceeds of $3.6 million. All
outstanding shares of convertible preferred stock automatically converted into
9.6 million shares of common stock upon the closing of our IPO in October
2007. In
connection with the IPO, we amended our articles of incorporation to provide for
the issuance of up to 5,000,000
shares of preferred stock in such series and with such rights and preferences as
may be approved by the board of
directors. As of September 30, 2008, there were no shares of preferred stock
outstanding.
Common
Stock
Under our
amended articles of incorporation, we are authorized to issue
65,000,000 shares of $0.01 par value common
stock. Each holder of common stock has the right to one vote but does not have
cumulative voting rights. Shares of
common stock are not subject to any redemption or sinking fund provisions, nor
do they have any preemptive, subscription or conversion rights. Holders of
common stock are entitled to receive dividends whenever funds are legally
available and when declared by the board of directors, subject to the prior
rights of holders of all classes of stock
outstanding having priority rights as to dividends. No dividends have been
declared or paid as of September 30, 2008. In August
2007, we filed an amendment to our articles of incorporation to effect a 1-for-2
reverse stock split of our common stock. All share and per share amounts
relating to the common stock, stock options and warrants and the conversion
ratios of preferred stock included in the financial statements and footnotes
have been restated to reflect the reverse
stock split. In
October 2007, we completed an initial public offering of our common stock in
which we sold and issued 5,000,000
shares of our common stock at a price to the public of $4.00 per share. We
raised a total of $20.0 million from the
IPO, or approximately $17.1 million in net cash proceeds after deducting
underwriting discounts and commissions of $1.4 million and other offering costs
of $1.5 million.
Stock
Warrants
Warrants
to acquire shares of common stock were issued in connection with the sales of
the Series A and Series B Convertible Preferred Stock and certain convertible
notes. Additionally, in October 2007, warrants were issued to the underwriters
in connection with the IPO. The significant terms of the Series A, Series B,
Note, and Underwriter warrants were as
follows:
·
<?xml:namespace prefix = ns1 ns = "http://www.rrd.com/pageprorwp" />Series A Warrants—The
warrants issued with the sale of Series A Preferred Stock were issued on the
basis of 0.20 of a warrant for every share of Series A Preferred Stock
purchased. The exercise price of these warrants was $1.20 per share. We extended
a limited-time offer to holders of the warrants to exercise them at a price of
$0.80 per share. The warrants expired on July 1, 2005, except for warrants
issued in connection with later purchases of the Series A Preferred Stock for
which the expiration date was extended to July 1, 2006. <?xml:namespace
prefix = o ns = "urn:schemas-microsoft-com:office:office" />
·
Series B Warrants—The
warrants issued with the sale of Series B Preferred Stock were issued on the
basis of 0.175 of a warrant for every share of Series B Preferred Stock
purchased. The exercise price of these warrants was $0.80 per share. The
warrants expired on June 30, 2006.
·
Note Warrants—Warrants
were granted in connection with promissory notes issued to certain of our
shareholders in 2002 and 2003. The warrants issued to these shareholders had an
exercise price of $1.20 per share. The warrants expired on June 30, 2006.
·
Underwriter Warrants—In
connection with the IPO, we issued warrants to the underwriters to purchase an
aggregate of 350,000 shares of common stock at an exercise price of $4.00
per share. The warrants are exercisable on or after October 31, 2008 and
expire on October 31, 2010. The warrants were valued at approximately
$524,000 using the Black-Scholes-Merton option-pricing model based upon the
following assumptions: (1) expected price volatility of 50.0%, (2) a
risk-free interest rate of 3.94% and (3) a contractual life of 3 years. We
accounted for the fair value of the Underwriter Warrants as an expense of the
IPO resulting in a charge to stockholders’ equity.
·
Advisory Services
Warrants - In April 2008, we issued a two year warrant and a four year
warrant to purchase an aggregate of 300,000 of common stock to PM Holdings Ltd.
as part of our consideration for the revision of the agreement dated February
13, 2007 with PM Holdings. Under the terms of the original agreement, we
agreed to pay PM Holdings $28,000 per month through February 2010 for financial
and investor relations advisory services. The amendment to this agreement
eliminates the monthly cash payment obligation and instead provides for a
one-time, upfront cash payment of $264,000 and the issuance of warrants to
purchase 300,000 of common stocks at an exercise price of $4.00 per share.
At
September 30, 2008, there were outstanding warrants to purchase 650,000
shares of common stock at a weighted-average exercise price of $4.00 per share.
None of the warrants were exercisable at September 30,
2008.
NOTE
10. EQUITY-BASED COMPENSATION
Equity
Compensation Plans
Prior to
the IPO, we had two equity plans in place: the 2002 Stock Option Plan and the
2005 Stock Option Plan. Upon the closing of the IPO in October 2007, we adopted
the 2007 Omnibus Incentive Plan (the “2007 Plan”) to provide for the granting of
stock awards, such as stock options, unrestricted and restricted common stock,
stock units, dividend equivalent rights, and stock appreciation rights to
employees, directors and outside consultants as determined by the board of
directors. In conjunction with the adoption of the 2007 Plan, no further option
awards may be granted from the 2002 or 2005 Stock Option Plans and any option
cancellations or expirations from the 2002 or 2005 Stock Option Plans may not be
reissued. At the inception of the 2007 Plan, 2,000,000 shares were reserved for
issuance under the Plan. As of September 30, 2008, there were 538,131 shares
available for future grants under the 2007 Plan.
Under the terms of the
2007 Plan, the exercise price of incentive stock options may not be less than
100% of the fair market value of the common stock on the date of grant and , if
granted to an owner of more than 10% of our stock, then not less than 110%.
Stock options granted under the 2007 Plan expire no later than ten years from
the date of grant. Stock options granted to employees generally vest over four
years while options granted to directors and consultants typically vest over a
shorter period, subject to continued service. All of the options granted prior
to October 2007 include early exercise provisions that allow for full exercise
of the option prior to the option vesting, subject to certain repurchase
provisions. We issue new shares to satisfy option exercises under the
plans.
Stock
Options Summary
The
following table summarizes information about our stock options outstanding at
September 30, 2008 and activity during the period then ended.
|
(in
thousands, except per share data)
|
|
Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding
at December 31, 2007
|
|
|
2,896 |
|
|
$ |
1.57 |
|
|
|
|
|
|
|
|
Options
granted
|
|
|
877 |
|
|
$ |
2.41 |
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(122 |
) |
|
$ |
1.18 |
|
|
|
|
|
|
|
|
Options
forfeited/cancelled
|
|
|
(149 |
) |
|
$ |
2.90 |
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2008
|
|
|
3,502 |
|
|
$ |
1.74 |
|
|
|
7.3 |
|
|
|
1,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest at September 30, 2008
|
|
|
3,315 |
|
|
$ |
1.68 |
|
|
|
7.2 |
|
|
|
1,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
at September 30, 2008
|
|
|
1,943 |
|
|
$ |
0.98 |
|
|
|
5.6 |
|
|
|
1,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2008
|
|
|
2,368 |
|
|
$ |
1.29 |
|
|
|
6.2 |
|
|
|
1,631 |
|
The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying stock option awards and the closing market price of our
common stock as quoted on the American Stock Exchange as of September 30, 2008.
The aggregate intrinsic value of stock option awards exercised was $25,000 for
the three months and $103,000 for the nine months ended September 30, 2008,
as determined at the date of option exercise. We received cash payments for the
exercise of stock options in the amount of $11,000 during the three months and
$150,000 during the nine months ended September 30, 2008.
The
options outstanding and vested by exercise price at September 30, 2008 were as
follows (number of options in thousands):
|
Range
of Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
|
Number
Vested
|
|
|
Weighted
Average Exercise Price
|
|
| $ |
0.20 |
|
|
|
544 |
|
|
$ |
0.20 |
|
|
|
3.4 |
|
|
|
544 |
|
|
$ |
0.20 |
|
| $ |
0.30 |
|
|
|
318 |
|
|
$ |
0.30 |
|
|
|
5.3 |
|
|
|
318 |
|
|
$ |
0.30 |
|
| $ |
0.56 |
|
|
|
191 |
|
|
$ |
0.56 |
|
|
|
5.7 |
|
|
|
184 |
|
|
$ |
0.56 |
|
| $ |
0.94 -
$1.20 |
|
|
|
278 |
|
|
$ |
1.15 |
|
|
|
5.9 |
|
|
|
215 |
|
|
$ |
1.14 |
|
| $ |
1.70 -
$1.95 |
|
|
|
1,189 |
|
|
$ |
1.82 |
|
|
|
8.7 |
|
|
|
535 |
|
|
$ |
1.70 |
|
| $ |
2.00 -
$2.90 |
|
|
|
243 |
|
|
$ |
2.22 |
|
|
|
8.6 |
|
|
|
83 |
|
|
$ |
2.21 |
|
| $ |
3.56 -
$4.00 |
|
|
|
739 |
|
|
$ |
3.71 |
|
|
|
9.2 |
|
|
|
64 |
|
|
$ |
4.00 |
|
| |
|
|
|
|
3,502 |
|
|
$ |
1.74 |
|
|
|
7.3 |
|
|
|
1,943 |
|
|
$ |
0.98 |
|
Stock
Option Awards to Employees and Directors
We grant
options to purchase common stock to some of our employees and directors at
prices equal to or greater than the market value of the stock on the dates the
options are granted. We have estimated the value of certain stock option awards
as of the date of the grant by applying the Black-Scholes-Merton option pricing
valuation model using the single-option valuation approach. The application of
this valuation model involves assumptions that are judgmental and subjective in
nature. See Note 2 for a description of the accounting policies that we applied
to value our stock-based awards.
The
weighted average assumptions used in determining the value of options granted
and a summary of the methodology applied to develop each assumption are as
follows:
| |
|
Nine
Months Ended
|
|
|
|
|
September
30
|
|
|
Assumption
|
|
2008
|
|
|
2007
|
|
|
Expected
price volatility
|
|
|
70
|
% |
|
|
72 |
% |
|
Expected
term (in years)
|
|
|
6.1
|
|
|
|
6 |
|
|
Risk-free
interest rate
|
|
|
3.1 |
% |
|
|
4.8 |
% |
|
Dividend
yield
|
|
|
0 |
% |
|
|
0 |
% |
|
Weighted-average
fair value of options granted during the period
|
|
$ |
1.57 |
|
|
$ |
0.77 |
|
Expected
Price Volatility—This is a measure of the amount by which the stock price
has fluctuated or is expected to fluctuate. Prior to the adoption of SFAS
No. 123R, we assumed 0% price volatility in accordance with the minimum
value method requirements of SFAS No. 123. Under SFAS No. 123R, which
we adopted on January 1, 2006, the computation of expected volatility was
based on the historical volatility of comparable companies from a representative
peer group selected based on industry and market capitalization data. An
increase in the expected price volatility will increase the value of the option
granted and the related compensation expense.
Expected
Term—This is the period of time over which the options granted are
expected to remain outstanding. Because there is insufficient historical
information available to estimate the expected term of the stock-based awards,
we adopted the simplified method for estimating the expected term pursuant to
SAB No. 107 “Share Based Payment”. On this basis, we estimated the expected
term of options granted by taking the average of the vesting term and the
contractual term of the option. An increase in the expected life will increase
the value of the option granted and the related compensation
expense.
Risk-Free
Interest Rate—This is the U.S. Treasury rate for the week of the grant
having a term approximating the expected life of the option. An increase in the
risk-free interest rate will increase the value of the option granted and the
related compensation expense.
Dividend
Yield—We have not made any dividend payments nor do we have plans to pay
dividends in the foreseeable future. An increase in the dividend yield will
decrease the value of the option granted and the related compensation
expense.
Under
SFAS No. 123R, forfeitures are estimated at the time of grant and reduce
compensation expense ratably over the vesting period. This estimate is adjusted
periodically based on the extent to which actual forfeitures differ, or are
expected to differ, from the previous estimate. For the three and nine months
ended September 30, 2008, we applied an estimated forfeiture rate of 5% to
employee grants and 0% to director grants.
For
the three months ended September 30, 2008 and 2007, we recognized stock-based
compensation expense of $179,000 and $67,000, respectively, for option awards to
employees and directors. For the nine months ended September 30, 2008 and 2007,
we recognized $667,000 and $287,000, respectively. As of September 30, 2008,
total unrecognized compensation cost related to unvested stock options granted
or modified on or after January 1, 2006 was $2.2 million. This amount is
expected to be recognized as stock-based compensation expense in our statements
of operations over the remaining weighted average vesting period of 3.14
years.
Common
Stock Awards to Directors
In
connection with the close of the IPO in October 2007, we adopted a new Director
Compensation Plan to compensate our non-employee directors for their services.
Under the terms of the Director Compensation Plan, each non-employee director is
entitled to a combination of cash and unrestricted common stock for each board
and committee meeting attended, up to specified annual maximums. In accordance
with these provisions, we issued an aggregate of 45,946 shares of common stock
to our non-employee directors during the nine months ended September 30, 2008.
These shares were issued out of the 2007 Plan. The fair market value of the
stock issued to directors was recorded as an operating expense in the period in
which the meeting occurred, resulting in total compensation expense of $21,598
and $114,885, respectively, for common stock awards to directors during the
three and nine months ended September 30, 2008.
Stock-Based
Awards to Non-Employees
During
the three and nine months ended September 30, 2008, we granted options to
purchase an aggregate of 16,000 shares of common stock to non-employees in
exchange for advisory and consulting services. During the nine months ended
September 30, 2007, we granted an aggregate of 51,208 options to purchase common
stock to non-employees. The stock options are recorded at their fair value on
the measurement date and recognized over the respective service or vesting
period. The fair value of the stock options granted was calculated using the
Black-Scholes-Merton option pricing model based upon the following
assumptions:
|
|
|
Nine
Months Ended
September
30,
|
|
|
Assumption
|
|
2008
|
|
|
2007
|
|
|
Expected
price volatility
|
|
|
70 |
% |
|
|
72 |
% |
|
Expected
term (in years)
|
|
|
6.1 |
|
|
|
5.3 |
|
|
Risk-free
interest rate
|
|
|
3.1 |
% |
|
|
4.8 |
% |
|
Dividend
yield
|
|
|
0 |
% |
|
|
0 |
% |
|
Weighted
average fair values of option granted during the period
|
|
$ |
1.26 |
|
|
$ |
1.44 |
|
For the
three months ended September 30, 2008 and 2007, we recognized stock-based
compensation expense of $3,000 and $7,000, respectively, related to non-employee
option grants. For the nine months ended September 30, 2008 we reversed
previously recognized expense of $11,000 due to the required revaluation of
unvested non-employee grants. For the nine months ended September 30, 2007, we
recognized $51,000 of expense related to non-employee grants.
Summary
of Stock-Based Compensation Expense Under SFAS No. 123R
Upon the
adoption of SFAS No. 123R on January 1, 2006, we began recognizing
stock-based compensation expense in the statements of operations for all
employee and director equity awards granted or modified on or after the adoption
date. Stock-based compensation expense is classified in the statements of
operations in the same expense line items as cash compensation. Since we
continue to operate at a net loss, we do not expect to realize any current tax
benefits related to stock options.
A summary
of the stock-based compensation expense included in results of operations for
the option and stock awards to employees and directors discussed above is as
follows:
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Research
and development
|
|
$ |
81 |
|
|
$ |
36 |
|
|
$ |
336 |
|
|
$ |
126 |
|
|
General
and administrative
|
|
|
98 |
|
|
|
31 |
|
|
|
331 |
|
|
|
161 |
|
|
Total
stock-based compensation expense
|
|
$ |
179 |
|
|
$ |
67 |
|
|
$ |
667 |
|
|
$ |
287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
11. COLLABORATION AND LICENSE AGREEMENTS
Alcon
Manufacturing, Ltd.
In August
2006, we entered into a collaboration and license agreement with Alcon
Manufacturing, Ltd. (“Alcon”) to license to Alcon the exclusive rights to
develop, manufacture and commercialize products incorporating the Aganocide
compounds for application in connection with the eye, ear and sinus and for use
in contact lens solution. Under the terms of the agreement, Alcon agreed to pay
an up-front, non-refundable, non-creditable technology access fee of $10.0
million upon the effective date of the agreement. This up-front fee was recorded
as deferred revenue and is being amortized into revenue on a straight-line basis
over the four-year funding term of the agreement, through August 2010.
Additionally, we will receive semi-annual payments to support on-going research
and development activities over the four year funding term of the agreement. The
research and development support payments include amounts to fund a specified
number of personnel engaged in collaboration activities and to reimburse for
qualified equipment, materials and contract study costs. Our obligation to
perform research and development activities under the agreement expires at the
end of the four year funding term. As product candidates are developed and
proceed through clinical trials and approval, we will receive milestone
payments. If the products are commercialized, we will also receive royalties on
any sales of products containing the Aganocide compound. Alcon has the right to
terminate the agreement in its entirety upon nine months’ notice, or terminate
portions of the agreement upon 135 days’ notice, subject to certain provisions.
Both parties have the right to terminate the agreement for breach upon 60 days’
notice.
For the
three months ended September 30, 2008 and 2007, we recognized revenue of $0.6
million and $0.6 million, respectively, for amortization of the upfront
technology access fee. For the three months ended September 30, 2008 and 2007
we also
recognized $0.7 million and $0.7 million, respectively, for the on-going
research and development activities performed. During the three months ended
September 30, 2008 and 2007, we recognized $259,000 and $84,000 respectively,
for materials, equipment and contract study costs which have been or will be
reimbursed by Alcon. In total, we recognized revenue of $1.6 million and $1.4
million for the three months ended September 30, 2008 and 2007.
For the
nine months ended September 30, 2008 and 2007, we recognized revenue of $1.9
million and $1.9 million, respectively, for amortization of the upfront
technology access fee. For the nine months ended September 30, 2008 and 2007
we also
recognized $2.0 million and $2.0 million, respectively, for the on-going
research and development activities performed. During the nine months ended
September 30, 2008 and 2007, we also recognized $518,000 and $427,000,
respectively, for materials, equipment and contract study costs which have been
or will be reimbursed by Alcon. In total, we recognized revenue of $4.4 million
and $4.3 million for the nine months ended September 30, 2008 and
2007.
At
September 30, 2008, we had a deferred revenue balance of $5.3 million related to
the Alcon agreement which was comprised of $4.8 million for the upfront
technology access fee and $513,000 for other prepaid reimbursements.
As of
September 30, 2008, we had not earned or received any milestone or royalty
payments under the Alcon agreement.
KCI
International VOF GP
In June
2007, we entered into a license agreement with an affiliate of Kinetic Concepts,
Inc. (“KCI”), under which we granted KCI the exclusive rights to develop,
manufacture and commercialize NVC-101, or NeutroPhase, as well as other products
containing hypochlorous acid as the principal active ingredient, worldwide for
use in wound care in humans, other than products or uses intended for the eye,
ear or nose. Under the terms of the agreement, KCI paid to us a non-refundable
technology access fee of $200,000. The up-front technology access fee was
recorded as deferred revenue and is being amortized into revenue on a
straight-line basis over the 18-month performance obligation period, through
December 2008. Under the agreement, we are also entitled to receive
reimbursements for qualified consulting, materials and contract study costs. In
addition, we are entitled to receive payments of up to $1.25 million if certain
milestones are met. If products covered by the license are commercially
launched, we will also receive royalty payments based on net revenues from sales
by KCI of such products. KCI has the right to terminate the agreement without
penalty upon 60 days’ notice. We have the right to terminate the agreement if
KCI has not commercially launched a product incorporating NVC-101, or any other
product containing hypochlorous acid, within 18 months of the date of the
agreement. Both parties have the right to terminate the agreement for breach
upon 60 days’ notice.
For the
three months ended September 30, 2008 and 2007, we recognized revenue of $33,000
and $33,000 respectively, for amortization of the upfront technology access fee.
For the three months ended September 30, 2008 and 2007 we recognized $0
and $26,000 of revenue for consulting and materials costs reimbursable by KCI.
In total, we recognized revenue of $33,000 and $59,000 for the three months
ended September 30, 2008 and 2007.
For the
nine months ended September 30, 2008 and 2007, we recognized revenue of $100,000
and $39,000, respectively, for amortization of the upfront technology access
fee. For the nine months ended September 30, 2008 and 2007 we also recognized
$8,000 and $26,000, respectively, for consulting and materials cost which have
been or will be reimbursed by KCI. In total, we recognized revenue of $108,000
and $65,000 for the nine months ended September 30, 2008 and 2007.
At September 30, 2008, we
had a deferred revenue balance of $28,000 related to the KCI agreement which
consisted of the remaining amount to be amortized for the upfront technology
access fee. As of September 30, 2008, we had not earned or received any
milestone or royalty payments under the KCI
agreement.
NOTE
12. EMPLOYEE BENEFIT PLAN
We
have a 401(k) plan covering all eligible employees. We are not required to
contribute to the plan and have made no
contributions through September 30, 2008.
NOTE
13. INCOME TAXES
As of
December 31, 2007 we had net operating loss carryforwards for both federal
and state income tax purposes of $10.1 million. If not utilized, the federal and
state net operating loss carryforwards will begin expiring at various dates
between 2014 and 2027. Current federal and California tax laws include
substantial restrictions on the utilization of net
operating loss carryforwards in the event of an ownership change of a
corporation. Accordingly, our ability to utilize net
operating loss carryforwards may be limited as a result of such ownership
changes. Such a limitation could result in the expiration of carryforwards
before they are utilized. We track the portion of our federal and state net
operating loss carryforwards attributable to stock option benefits in a separate
memo account pursuant to SFAS No. 123R. Therefore, these amounts are not
included in gross or net deferred tax assets. Pursuant to SFAS No. 123R,
the benefit of these net operating loss carryforwards will only be recorded to
equity when they reduce cash taxes payable. We elected to use the
“with-and-without” approach for utilizing the tax benefits of stock option
exercises under SFAS No. 123R. These benefits would result in a credit to
additional paid-in-capital when they reduce income taxes
payable.
Uncertain
Income Tax Positions
In
July 2006, the FASB released Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). FIN 48
prescribes the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also requires
additional disclosure of the beginning and ending unrecognized tax benefits and
details regarding the uncertainties that may cause the unrecognized benefits to
increase or decrease within a twelve month
period.
We adopted the provisions
of FIN 48 on January 1, 2007. There was no impact on our consolidated
financial position, results of operations and cash flows as a result of the
adoption. We have no unrecognized tax benefit as of December 31, 2007,
including no accrued amounts for interest and penalties. Our policy will be to
recognize interest and penalties related to income taxes as a component of
income tax expense. We are subject to income tax examinations for U.S. incomes
taxes and state income taxes from 2002 forward. We do not anticipate that total
unrecognized tax benefits will significantly change prior to December 31,
2008.
NOTE
14. SUBSEQUENT EVENTS
None.
The
information contained in this Quarterly Report on Form 10-Q is not a complete
description of our business or the risks associated with an investment in our
common stock. We urge you to carefully review and consider the various
disclosures made by us in this report and in our other filings with the SEC
before deciding to purchase, hold or sell our common stock.
This
report contains forward-looking statements that are based on our management’s
beliefs and assumptions and on information currently available to our
management. These forward-looking statements include but are not limited to
statements regarding our product candidates, market opportunities, competition,
strategies, anticipated trends and challenges in our business and the markets in
which we operate, and anticipated expenses and capital
requirements.
In
some cases, you can identify forward-looking statements by terms such as
“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” and
similar expressions intended to identify forward-looking statements.
Forward-looking statements speak only as of the date of this report and involve
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, performances or achievements expressed or implied by the
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed under the heading
“Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K and in
Part II, Item 1A of this report and in other documents we file from time to
time with the SEC. Except as required by law, we assume no obligation to update
any forward-looking statements publicly, or to update the reasons actual results
could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the
future.
Overview
We are a
clinical stage biopharmaceutical company focused on developing
innovative non-antibiotic, antimicrobial product candidates for the
treatment or prevention of a wide range of infections in hospital and
non-hospital environments. Many of these infections have become increasingly
difficult to treat because of the rapid rise in drug resistance. We have
discovered and are developing a class of non-antibiotic anti-infective
compounds, which we have named Aganocide compounds. These compounds are based
upon small molecules that are naturally generated by white blood cells when
defending the body against invading pathogens. We believe that our Aganocide
compounds could form a platform on which to create a variety of products to
address differing needs in the treatment and prevention of bacterial and viral
infections. In laboratory testing, our Aganocide compounds have demonstrated the
ability to destroy all bacteria against which they have been tested.
Furthermore, because of their mechanism of action, we believe that bacteria are
unlikely to develop resistance to our Aganocide compounds.
In August
2006, we entered into a collaboration and license agreement with Alcon, to
license to Alcon the exclusive rights to develop, manufacture and commercialize
products incorporating the Aganocide compounds for application in connection
with the eye, ear and sinus and for use in contact lens solution. Under the
terms of the agreement, Alcon agreed to pay an up-front, non-refundable,
non-creditable technology access fee of $10.0 million upon the effective date of
the agreement. In addition to the technology access fee, we are entitled to
receive semi-annual payments from Alcon to support on-going research and
development activities over the four year funding term of the agreement. The
research and development support payments include amounts to fund a specified
number of personnel engaged in collaboration activities and to reimburse for
qualified equipment, materials and contract study costs. As product candidates
are developed and proceed through clinical trials and approval, we will receive
milestone payments. If the products are commercialized, we will also receive
royalties on any sales of products containing the Aganocide compounds. Alcon has
the right to terminate the agreement in its entirety upon nine months’ notice,
or terminate portions of the agreement upon 135 days’ notice, subject to certain
provisions. Both parties have the right to terminate the agreement for breach
upon 60 days’ notice.
Alcon is
responsible for all of the costs that it incurs in developing the products using
the Aganocide compounds. We have
not achieved any milestones nor has any product been commercialized to date. The
achievement of the milestones and product commercialization is subject to many
risks and uncertainties, including, but not limited to Alcon’s ability to obtain
regulatory approval from the FDA and Alcon’s ability to execute its clinical
initiatives. Therefore, we cannot predict when, if ever, the milestones
specified in the Alcon agreement will be achieved or when we will receive
royalties on sales of
commercialized product.
In June
2007, we entered into a license agreement with KCI, under which we granted KCI
the exclusive rights to develop, manufacture and commercialize NeutroPhase, as
well as other products containing hypochlorous acid as the principal active
ingredient, worldwide for use in wound care in humans, other than products or
uses intended for the eye, ear or nose. Under the terms of the agreement, KCI
paid to us a non-refundable technology access fee of $200,000. We are also
entitled to receive reimbursements for qualified consulting, materials and
contract study costs. In addition, we are entitled to receive payments of up to
$1.25 million if certain milestones are met. If products covered by the license
are commercially launched, we will also receive royalty payments based on net
revenues from sales by KCI of such products. KCI has the right to
terminate the agreement without penalty upon 60 days’ notice. We have the right
to terminate the agreement if KCI has not commercially launched a product
incorporating NVC-101, or any other product containing hypochlorous acid,
within 18
months of the date of the agreement. Both parties have the right to terminate
the agreement for breach upon 60 days’
notice.
We cannot
control whether or when KCI will launch any products incorporating NeutroPhase,
or any other products containing hypochlorous acid as the principal active
ingredient, and therefore cannot predict whether or when we will receive
royalties on sales of commercialized products. To date,
we have generated no revenue from product sales, and we have financed our
operations and internal growth primarily through the sale of our capital stock.
We have also recently begun to generate revenue under our agreements with Alcon
and KCI. We are a development stage company and have incurred significant losses
since commencement of our operations in July 2002, as we have devoted
substantially all of our resources to research and development. As of September
30, 2008, we had an accumulated deficit of $25.0 million. Our accumulated
deficit resulted from research and development expenses and general and
administrative expenses. We expect to continue to incur net losses over the next
several years as we continue our clinical and research and development
activities and as we apply for patents and regulatory
approvals.
Recent
Events
In July 2008, we have our
second issued patent in the U.S. The patent provides coverage for a
method of disinfecting open wounds and burns, promoting wound healing and
providing ocular disinfection using a specific range of formulations of
NVC-101. This patent was issued on July 1, 2008 and will expire in
2024.
In July 2008, we completed
a successful testing of our formulation of our lead Aganocide compound for
dermatological uses, known as AgaDerm in a challenging animal model
of dermatophyte infection. The study showedhat the AgaDerm
formulation delivered an Aganocide compound effectively when applied on the
surface of the skin and enhanced its penetration into hair
follicles. The infectious agent was a dermatophyte,
Trichophyton mentagrophytes, a parasitic fungus that causes infections of the
nails, hair and skin, including ringworm. The Aganocide compound in the AgaDerm
formulation was shown to be highly effective not only on the skin surface, but
also showed potent ability to kill organisms invading the
hair.
Critical
Accounting Policies and Estimates
Our
financial statements have been prepared in accordance with generally accepted
accounting principles in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported revenues and expenses during
the reporting periods.
In
preparing these financial statements, management has made its best estimates and
judgments of certain amounts included in the financial statements giving due
consideration to materiality. On an ongoing basis, we evaluate our estimates and
judgments related to revenue recognition, income taxes, intangible assets,
long-term service contracts and other contingencies. We base our estimates on
historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
While our significant
accounting policies are more fully described in Note 2 of the Notes to Condensed
Consolidated Financial Statements included in Part I, Item 1 of this
report, we believe that the following accounting policies are most critical to
aid you in fully understanding and evaluating our reported financial
results.
Revenue
Recognition
License
and collaboration revenue is primarily generated through agreements with
strategic partners for the development and commercialization of our product
candidates. The terms of the agreements typically include non-refundable upfront
fees, funding of research and development activities, payments based upon
achievement of certain milestones and royalties on net product sales. In
accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue
Arrangements with Multiple Deliverables”, we analyze our multiple element
arrangements to determine whether the elements can be separated. We perform our
analysis at the inception of the arrangement and as each product or service is
delivered. If a product or service is not separable, the combined deliverables
are accounted for as a single unit of accounting and recognized over the
performance obligation period. We recognize revenue in accordance with SEC Staff
Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial
Statements”, as amended by SAB No. 104 (together, SAB 104). In accordance
with SAB 104, revenue is recognized when the following criteria have been met:
persuasive evidence of an arrangement exists; delivery has occurred and risk of
loss has passed; the seller’s price to the buyer is fixed or determinable; and
collectibility is reasonably assured.
Assuming
the elements meet the EITF No. 00-21 criteria for separation and the SAB 104
requirements for recognition, the revenue recognition methodology prescribed for
each unit of accounting is summarized below:
Upfront
Fees—We defer recognition of non-refundable upfront fees if we have
continuing performance obligations without which the technology licensed has no
utility to the licensee. If we have continuing involvement through research and
development services that are required because our know-how and expertise
related to the technology is proprietary to us, or can only be performed by us,
then such up-front fees are deferred and recognized over the period of
continuing involvement.
Funded
Research and Development—Revenue from research and development services
is recognized during the period in which the services are performed and is based
upon the number of full-time-equivalent personnel working on the specific
project at the agreed-upon rate. Reimbursements from collaborative partners for
agreed upon direct costs including direct materials and outsourced, or
subcontracted, pre-clinical studies are classified as revenue in accordance with
EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as
an Agent,” and recognized in the period the reimbursable expenses are incurred.
Payments received in advance are recorded as deferred revenue until the research
and development services are performed or costs are
incurred.
Milestones—Substantive
milestone payments are considered to be performance bonuses that are recognized
upon achievement of the milestone only if all of the following conditions are
met: the milestone payments are non-refundable; achievement of the milestone
involves a degree of risk and was not reasonably assured at the inception of the
arrangement; substantive effort is involved in achieving the milestone; the
amount of the milestone is reasonable in relation to the effort expended or the
risk associated with achievement of the milestone; and a reasonable amount of
time passes between the up-front license payment and the first milestone payment
as well as between each subsequent milestone payment. If any of these conditions
are not met, the milestone payments are deferred and recognized as revenue over
the term of the arrangement as we complete our performance
obligations.
Royalties—We
recognize royalty revenues from licensed products upon the sale of the related
products.
Research
and Development Costs
We charge research and
development costs to expense as incurred. These costs include salaries and
benefits for research and development personnel, costs associated with clinical
trials managed by contract research organizations, and other costs associated
with research, development and regulatory activities. We use external service
providers to conduct clinical trials, to manufacture supplies of product
candidates and to provide various other research and development-related
products and services.
We
expense patent costs, including legal expenses, in the period in which they are
incurred. Patent expenses are included as general and administrative expenses in
our statements of operations.
Stock-Based
Compensation
On
January 1, 2006, we adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based
Payment”. SFAS No. 123R replaced SFAS No. 123 and superseded
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
Issued to Employees” and related interpretations. Under the fair value
recognition provisions of SFAS No. 123R, stock-based compensation expense
is measured at the grant date for all stock-based awards to employees and
directors and is recognized as expense over the requisite service period, which
is generally the vesting period. We were required to utilize the prospective
application method prescribed by SFAS No. 123R, under which prior periods
are not revised for comparative purposes. Under the prospective application
transition method, non-public entities that previously used the minimum value
method of SFAS No. 123 should continue to account for non-vested equity
awards outstanding at the date of adoption of SFAS No. 123R in the same
manner as they had been accounted for prior to adoption. SFAS No. 123R
specifically prohibits pro forma disclosures for those awards valued using the
minimum value method. The valuation and recognition provisions of SFAS
No. 123R apply to new awards and to awards outstanding as of the adoption
date that are subsequently modified. The adoption of SFAS No. 123R had a
material effect on our financial position and results of operations. See Note 10
of the Notes to Condensed Consolidated Financial Statements for further
information regarding stock-based compensation expense and the assumptions used
in estimating that expense.
Prior to
the adoption of SFAS No. 123R, we valued our stock-based awards using the
minimum value method and provided pro-forma information regarding stock-based
compensation and net income required by SFAS No. 123. We did not recognize
stock-based compensation expense in our statements of operations for option
grants to our employees or directors for the periods prior to our adoption of
SFAS No. 123R because the exercise price of options granted was generally
equal to the fair market value of the underlying common stock on the date of
grant.
We
account for stock compensation arrangements with non-employees in accordance
with SFAS No. 123R and EITF
Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services”, which require that such equity instruments are recorded at their fair
value on the measurement date. The measurement of stock-based compensation is
subject to periodic adjustment as the underlying equity instruments vest.
Non-employee stock-based compensation charges are amortized over the vesting
period on a straight-line basis. For stock options granted to non-employees, the
fair value of the stock options is estimated using a Black-Scholes-Merton
valuation model.
Income
Taxes
We
account for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is recognized if it is more likely than not that some
portion or the entire deferred tax asset will not be recognized.
Recent
Accounting Pronouncements
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”. SFAS No. 161 changes the disclosure
requirements for derivative instruments and hedging activities by requiring
enhanced disclosures about how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for under SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities,”
and how derivative instruments and related hedged items affect an entity’s
operating results, financial position, and cash flows. SFAS No. 161 is
effective for fiscal years beginning after November 15, 2008. Early
adoption is permitted. We are currently reviewing the provisions of SFAS
No. 161 and have not yet adopted the statement. However, as the provisions
of SFAS No. 161 are only related to disclosure of derivative and hedging
activities, we do not believe the adoption of SFAS No. 161 will have a
material impact on our consolidated operating results, financial position, or
cash flows.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets or FSP FAS 142-3. FSP FAS 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets. The intent of the position is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the intangible asset. FSP FAS 142-3 is effective for fiscal years beginning
after December 15, 2008. We are assessing the potential impact that the adoption
of FSP FAS 142-3 may have on its consolidated financial position, results of
operations or cash flows.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles or SFAS No. 162. SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. This statement shall be effective 60 days
following the Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. We
do not believe that implementation of this standard will have a material impact
on its consolidated financial position, results of operations or cash
flows.
In June 2008, the FASB
issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities,” (FSP EITF
03-6-1). FSP EITF 03-6-1 states that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether paid
or unpaid) are participating securities and shall be included in the computation
of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008. Management has
determined that the adoption of FSP EITF 03-6-1 will not have an impact on the
Financial Statements.
Results
of Operations
Three
Months Ended September 30, 2008 Compared with the Three Months Ended September
30, 2007
License
and Collaboration Revenue
Total
license and collaboration revenue was $1.6 million for the three months ended
September 30, 2008 and $1.4 million for the three months ended September 30,
2007. License and collaboration revenue consisted of amounts earned under the
license and collaboration agreements with Alcon and KCI for amortization of the
upfront technology access fees and amounts that have been or will be reimbursed
for the funding of research and development activities performed during the
period. The upfront technology access fee of $10.0 million from Alcon is being
amortized into revenue on a straight-line basis over the four year funding term
of the agreement, through August 2010. The upfront technology access fee from
KCI of $200,000 is being amortized on a straight-line basis over 18 months
through December 2008.
To the extent we earn
milestone payments under the Alcon and KCI collaborations, we would expect
revenues to increase. However, we cannot predict if and when we will receive any
milestones from our collaborations.
Research
and Development
Total
research and development expenses decreased by $608,000, to $1.4 million for the
three months ended September 30, 2008 compared with $2.0 million for the three
months ended September 30, 2007. The decrease was in part due to a decrease of
$913,000 in total clinical expenses largely due to the timing of pre-clinical
and clinical trials. The total clinical expense includes a decrease of $223,000
in pre-clinical studies costs for nasal studies. The total clinical expense also
includes a decrease of $159,000 in pre-clinical studies costs for CAUTI
(Catheter Associated Urinary Tract Infection). This also includes a decrease of
$335,000 for site investigator fees related to nasal research. The total
clinical expenses decrease also includes an overall decrease of $176,604 for
contract research organization fees.
Professional
services fees related to research and development increased by $15,000 from
$85,000 to $100,000 for the three months ended September 30, 2008 compared to
the three months ended September 30, 2007. Employee
costs related to research and development increased by $158,000, from $890,000
to $1.0 million for the three months ended September 30, 2008 compared to the
three months ended September 30, 2007. The increase was due to increased
headcount compared to the same period last
year.
We
expect that research and development expenses will continue to increase
substantially for the reminder of 2008 and in future years as we continue to
increase our focus on developing product candidates, both independently and in
collaboration with Alcon. In particular, we are expecting to incur significant
toxicology, clinical, chemistry and manufacturing expenses during 2008 in
connection with the pre-surgical nasal preparation and catheter associated
urinary tract infections programs.
General
and Administrative
General
and administrative expenses increased by $694,000, to $1.7 million for the three
months ended September 30, 2008 compared with $1.0 million for the three months
ended September 30, 2007. This increase was due in part to an increase of
$31,000 in depreciation expense from $48,000 to $79,000. The increase was also
in part attributable to a $52,000 increase in office and general expenses from
$169,000 to $221,000. The office and general expenses increased primarily due to
increased office supplies, rent, and utilities costs.
Professional
services fees related to general and administrative expenses increased by
$291,000, from $388,000 to $679,000. The increase in professional services fees
is primarily caused by increase costs in the following areas: investor relations
costs, legal fees related to intellectual property, consultant fees, patent
filing fees, and accounting fees. Employee
costs related to general and administrative expenses increased by $244,000, from
$371,000 to $615,000. The increase was due primarily to increased
headcount.
We expect
that general and administrative expenses will increase during 2008 and in
subsequent years due to increasing public company expenses and business
development costs and our expanding operational infrastructure. In particular,
we expect to incur increasing legal, accounting, investor relations, equity
administration and insurance costs in order to operate as a public
company.
Other
Income, Net
Other
income, net increased $5,000 to $77,000 for the three months ended September 30,
2008, compared with $72,000 for the three months ended September 30, 2007. This
increase was primarily attributable to increased interest income.
We expect
that other income, net will vary based on fluctuations in our cash balances and
borrowings under equipment loans and the interest rate paid on such balances and
borrowings.
Nine
months ended September 30, 2008 Compared with the Nine months ended September
30, 2007
License
and Collaboration Revenue
Total
license and collaboration revenue was $4.5 million for the nine months ended
September 30, 2008 and $4.4 million for the nine months ended September 30,
2007. License and collaboration revenue consisted of amounts earned under the
license and collaboration agreements with Alcon and KCI for amortization of the
upfront technology access fees and amounts that have been or will be reimbursed
for the funding of research and development activities performed during the
period. The upfront technology access fee of $10.0 million from Alcon is being
amortized into revenue on a straight-line basis over the four year funding term
of the agreement, through August 2010. The upfront technology access fee from
KCI of $200,000 is being amortized on a straight-line basis over 18 months
through December 2008.
To the extent we earn
milestone payments under the Alcon and KCI collaborations, we would expect
revenues to increase. However, we cannot predict if and when we will receive any
milestones from our collaborations.
Research
and Development
Research
and development expenses increased by $683,000 to $6.3 million for the nine
months ended September 30, 2008, compared with $5.6 million for the nine months
ended September 30, 2007. The increase was due in part to a $455,000 increase in
development expenses from $492,000 to $947,000. The increase was also in part
due to a $618,000 increase in employee costs related to research and development
from $2.6 million to $3.2 million. Employee costs increased due to an increase
in headcount.
Professional
services expenses related to research and development decreased by $9,000 to
$351,000, for the nine months ended September 30, 2008, compared to $360,000 for
the nine months ended September 30, 2007. The decrease was primarily
attributable to an decrease in consultant expenses related to research and
development.
We expect
that research and development expenses will continue to increase substantially
in 2008 and in subsequent years as we continue to increase our focus on
developing product candidates, both independently and in collaboration with
Alcon. In particular, we are expecting to incur significant toxicology,
clinical, chemistry and manufacturing expenses during 2008 in connection with
the pre-surgical nasal preparation and catheter associated urinary tract
infections programs.
General
and Administrative
General
and administrative expenses increased by $2.0 million, to $5.1 million for the
nine months ended September 30, 2008, compared with $3.1 million for the nine
months ended September 30, 2007. This increase was primarily due to a $742,000
increase in employee costs from $1.2 million to $2.0 million. Professional
services costs increased by $800,000, from $1.1 million to $1.9 million.
Investor relations costs increased by $147,000, from $47,000 to $194,000. Office
and general expenses increased by $184,000, from $554,000 to $738,000. The bulk
of the office expense increase is attributable to increased rent, because we
leased additional space during the second and fourth quarters of 2007 to
accommodate our increased personnel and expanded laboratory facilities. The
increase was also due in part to an increase of $94,000 in depreciation expense
from $128,000 to $222,000.
We expect
that general and administrative expenses will increase during 2008 and in
subsequent years due to increasing public company expenses and business
development costs and our expanding operational infrastructure.
In
particular, we expect to incur increasing legal, accounting, investor relations,
equity administration and insurance costs in order to operate as a public
company.
Other
Income, Net
Other
income, net increased by $27,000 to $334,000 for the nine months ended September
30, 2008, compared with $307,000 for the nine months ended September 30, 2007.
This increase was primarily attributable to increased interest income.
We expect
that other income, net will vary based on fluctuations in our cash balances and
borrowings under equipment
loans and the interest rate paid on such balances and
borrowings.
Liquidity
and Capital Resources
We have
incurred cumulative net losses of $25.0 million since inception through
September 30, 2008. We do not expect to generate significant revenue from
product candidates for several years. Since inception, we have funded our
operations primarily through the private placement of our preferred stock. We
raised total net proceeds of $647,000 through the sale of our Series A Preferred
Stock in 2002 and 2003, $3.0 million through the sale of our Series B Preferred
Stock in 2003 and 2004, $5.4 million through the sale of our Series C Preferred
Stock in 2004 and 2005, and $3.6 million through the sale of our Series D
Preferred Stock in 2005 and 2006. In October 2007, we completed our IPO in which
we raised a total of $20.0 million, or approximately $17.1 million in net cash
proceeds after deducting underwriting discounts and commissions of $1.4 million
and other offering costs of $1.5 million.
In August
2006, we entered into a collaboration and license agreement with Alcon. Under
the terms of this agreement, we received an up-front technology access fee of
$10.0 million in September 2006. Additionally, we are entitled to receive
semi-annual payments each January and July over the four year term of the
agreement to support on-going research and development efforts. In both January
and July 2007, we received a payment of $1.4 million to support the performance
of research and development activities throughout 2007. The Alcon agreement also
provides for milestone payments upon the achievement of specified milestones in
each field of use and royalty payments upon the sale of commercialized
products.
The
aggregate milestone payments payable in connection with the ophthalmic, otic and
sinus fields are $19 million, $12 million and $39 million, respectively. As of
September 30, 2008, we have not achieved any milestone nor has any product been
commercialized to date. The achievement of the milestones and product
commercialization is subject to many risks and uncertainties, including, but not
limited to Alcon’s ability to obtain regulatory approval from the FDA and
Alcon’s ability to execute its clinical initiatives. Therefore, we cannot
predict when, if ever, the milestones specified in the Alcon agreement will be
achieved or when we will receive royalties on sales of commercialized
products.
In June
2007, we entered into a license agreement with KCI. Under the terms of the
agreement, we received an
upfront technology access fee of $200,000 in June 2007. In addition, we are
entitled to receive payments of up to $1.25 million if certain milestones are
met. If products covered by the license are commercially launched, we will also
receive royalty payments based on net revenues from sales by KCI of such
products. As of September 30, 2008 we had not earned or received any milestone
or royalty payments under the KCI agreement. We cannot control whether or when
KCI will launch any products incorporating NeutroPhase, or any other products
containing hypochlorous acid as the principal active ingredient, and therefore
cannot predict whether or when we will receive royalties on sales of
commercialized products.
During
April 2007, we entered into a master security agreement to establish a $1.0
million equipment loan facility with a financial institution. The purpose of the
loan is to finance equipment purchases, principally in the build-out of our
laboratory facilities. Borrowings under the loan are secured by eligible
equipment purchased from January 2006 through April 2008 and will be repaid over
40 months at an interest rate equal to the greater of 5.94% over the three year
Treasury rate in effect at the time of funding or 10.45%. There are no loan
covenants specified in the agreement. As of September 30, 2008, we had an
outstanding equipment loan balance of $921,863 carrying a weighted-average
interest rate of 10.54%. The principal and interest due under the loan will be
repaid in equal monthly installments through May 2011. In January 2008, we
borrowed $203,000 under this equipment loan facility at an interest rate of
10.45%. As of September 30, 2008 there was $216,000 available for borrowing
under this equipment loan facility.
In March
2008, we amended the Financial Advisory and Investor Relations Consulting
Agreement dated February 13,
2007 with PM Holdings Ltd. Under the terms of the original agreement, we agreed
to pay PM Holdings $28,000
per month through February 2010 for financial and investor relations advisory
services. The amendment to this agreement eliminates the monthly cash payment
obligation and instead provides for a one-time, upfront cash payment of $264,000
and the issuance of warrants to purchase 300,000 common shares at an exercise
price of $4.00 per share. Under the amended agreement, no further cash or equity
amounts are payable during the duration of the agreement through February 2010.
We paid the upfront cash amount and issued the warrants during April
2008.
Cash
and Cash Equivalents
As of
September 30, 2008, we had cash, cash equivalents, and short-term investments of
$15.2 million compared to $6.9 million at September 30, 2007.
Cash
Flows
The
following table provides information regarding our cash flows and our capital
expenditures for the nine months ended September 30, 2008 and 2007.
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Nine
Months Ended
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September
30,
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(in
thousands)
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2008
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2007
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Cash
used in:
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Operating
activities
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(7,038 |
) |
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(3,615 |
) |
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Investing
activities
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7,505 |
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(198 |
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Financing
activities
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331 |
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(401 |
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Capital
expenditures (included in investing activities above)
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(521 |
) |
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(371 |
) |
Our
operating activities used cash of $7.0 million and $3.6 million for the nine
months ended September 30, 2008 and 2007, respectively. The use of cash in these
periods principally resulted from our losses from operations and changes in our
working capital accounts.
Our
investing activities provided cash of $7.5 million for the nine months ended
September 30, 2008. Our investing activities in the nine months ended September
30, 2008 included sales and maturities of marketable securities in our
investment portfolio in the amount of $40.1 million, offset by the purchases of
marketable securities in the amount of $32.1 million and purchases of property
and equipment in the amount of $521,000.
Our
investing activities used cash of $198,000 for the nine months ended September
30, 2007. Our investing activities in the nine months ended September 30, 2007
included sales and maturities of marketable securities in our investment
portfolio in the amount of $30.2 million, offset by the purchases of marketable
securities in the amount of $30.0 million and purchases of property and
equipment in the amount of $371,000.
Our
financing activities provided cash of $331,000 for the nine months ended
September 30, 2008. Our financing activities for the nine months ended September
30, 2008 included $422,000 from borrowings under an equipment loan, offset by
$216,000 in principal payments on an equipment loan and $28,000 in payments on
capital leases. Our financing activities also included $153,000 in proceeds from
the exercise of stock options.
Our
financing activities used cash of $401,000 for the nine months ended September
30, 2007. Our financing activities for the nine months ended September 30, 2007
included $494,000 from borrowings under an equipment loan, offset by $46,000 in
principal payments on an equipment loan and $22,000 in payments on capital
leases. Our financing activities for the nine months ended September 30, 2007
also included $926,000 in initial public offering costs, and $99,000 in proceeds
from the exercise of options or warrants.
We
believe our cash balance at September 30, 2008 is sufficient to fund our
projected operating requirements through at least the next twelve months.
However, we will need to raise additional capital or incur indebtedness to
continue to fund our operations in the future. Our future capital requirements
will depend on many factors, including:
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the scope, rate of
progress and cost of our pre-clinical studies and clinical trials and
other research
and development
activities;
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future
clinical trial results;
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the
terms and timing of any collaborative, licensing and other arrangements
that we may establish;
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the
cost and timing of regulatory
approvals;
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the cost of
establishing clinical and commercial supplies of our product candidates
and any products that we may
develop;
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the
effect of competing technological and market
developments;
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the cost of filing,
prosecuting, defending and enforcing any patent claims and other
intellectual property rights;
and
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the extent to which
we acquire or invest in businesses, products and technologies, although we
currently have no
commitments or agreements relating to any of these types of
transactions.
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We do not
anticipate that we will generate significant product revenue for a number of
years. Until we can generate a sufficient amount of product revenue, if ever, we
expect to finance future cash needs through public or private equity offerings,
debt financings or corporate collaboration and licensing arrangements, as well
as through interest income earned on cash balances and short-term investments.
To the extent that we raise additional funds by issuing equity securities, our
shareholders may experience dilution. In addition, debt financing, if available,
may involve restrictive covenants. To the extent that we raise additional funds
through collaboration and licensing arrangements, it may be necessary to
relinquish some rights to our technologies or product candidates, or grant
licenses on terms that are not favorable to us. If adequate funds are not
available, we may be required to delay, reduce the scope of or eliminate one or
more of our research or development programs or to obtain funds through
collaborations for some of our technologies or product candidates that we would
otherwise seek to develop on our own. Such collaborations may not be on
favorable terms or they may require us to relinquish rights to our technologies
or product candidates.
Net
Operating Losses and Tax Credit Carryforwards
As of December 31,
2007 we had net operating loss carryforwards for both federal and state income
tax purposes of $10.1 million. If not utilized, the federal and state net
operating loss carryforwards will begin expiring at various dates between 2014
and 2027. Current federal and California tax laws include substantial
restrictions on the utilization of net operating loss carryforwards in the event
of an ownership change of a corporation. Accordingly, our ability to utilize net
operating loss carryforwards may be limited as a result of such ownership
changes. Such a limitation could result in the expiration of carryforwards
before they are utilized.
Our
concentration of credit risk consists principally of cash, cash equivalents, and
short-term investments. Our exposure to market risk is limited primarily to
interest income sensitivity, which is affected by changes in interest rates,
particularly because the majority of our investments are in short-term debt
securities.
Our
investment policy restricts our investments to high-quality investments and
limits the amounts invested with any one issuer, industry, or geographic area.
The goals of our investment policy are as follows: preservation of capital;
assurance of liquidity needs; best available return on invested capital; and
minimization of capital taxation. Some of the securities in which we invest may
be subject to market risk. This means that a change in prevailing interest rates
may cause the principal amount of the investment to fluctuate. For example, if
we hold a security that was issued with an interest rate fixed at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. To minimize this risk, in
accordance with our investment policy, we maintain our cash and cash equivalents
in short-term marketable securities, including money market mutual funds,
Treasury bills, Treasury notes, commercial paper, and corporate and municipal
bonds. The risk associated with fluctuating interest rates is limited to our
investment portfolio. Due to the short term nature of our investment portfolio,
we believe we have minimal interest rate risk arising from our investments. We
do not use derivative financial instruments in our investment
portfolio.
To
date, we have operated exclusively in the United States and have not had any
material exposure to foreign
currency rate fluctuations. We have recently formed a wholly-owned subsidiary,
which is incorporated under the laws of
British Columbia (Canada), which may conduct research and development activities
in Canada. To the extent we
conduct operations in Canada, fluctuations in the exchange rates of the U.S. and
Canadian currencies may affect our
operating results.
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon
that evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures were effective to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and were
effective in ensuring that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act was accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
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. Assessing the costs and benefits of such controls and procedures
necessarily involves the exercise of judgment by management. 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, have been detected.
Changes
in Internal Control Over Financial Reporting
During
the fiscal quarter covered by this report, there were no changes in our internal
control over financial reporting, identified by our Chief Executive Officer or
our Chief Financial Officer in connection with the evaluation of the
effectiveness of our disclosure controls and procedures, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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The Company, on
occasion, is involved in legal matters arising in the ordinary course of
its business. While management believes that such matters are currently
insignificant, there can be no assurance that matters arising in the
ordinary course of business for which the Company is or could become
involved in litigation will not have a material adverse effect on its
business, financial condition or results of
operations.
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Our
business is subject to a number of risks, some of which are discussed below. You
should consider carefully the following risks in addition to the other
information contained in this report and our other filings with the
SEC, before deciding to buy, sell or hold our common stock. The risks
and uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we
currently believe are not important may also impair our business operations. If
any of the following risks actually occur, our business, financial condition or
results of operations could be materially adversely affected, the value of our
common stock could decline and you may lose all or part of your
investment.
Current
worldwide economic conditions may limit our access to capital, adversely affect
our business and financial condition, as well as further decrease our stock
price.
General worldwide economic
conditions have experienced a downturn due to the effects of the subprime
lending crisis, general credit market crisis, collateral effects on the finance
and banking industries, concerns about inflation, slower economic activity,
decreased consumer confidence, reduced corporate profits and capital spending,
adverse business conditions and liquidity concerns. Although the impact of the
downturn on our business is uncertain at this time, downturn may adversely
affect our business and operations. Like many other stocks, our stock price has
been subject to fluctuations and has decreased substantially in recent months.
Our stock price could further decrease due to concerns that our business,
operating results and financial condition will be negatively impacted by a
worldwide economic downturn.
We
may be unable to raise additional capital on acceptable terms in the future
which may in turn limit our ability to develop and commercialize products and
technologies.
We expect our capital
outlays and operating expenditures to substantially increase over at least the
next several years as we expand our product pipeline and increase research and
development efforts and clinical and regulatory activities. Conducting clinical
trials is very expensive, and we expect that we will need to raise additional
capital, through future private or public equity offerings, strategic alliances
or debt financing, before we achieve commercialization of any of our Aganocide
compounds. In addition, we may require even more significant capital outlays and
operating expenditures if we do not continue to partner with third
parties to develop and commercialize our products.
Our future capital
requirements will depend on many factors, including:
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the
scope, rate of progress and cost of our pre-clinical studies and clinical
trials and other research and development
activities;
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future
clinical trial results;
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the
terms and timing of any collaborative, licensing and other arrangements
that we may establish;
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the
cost and timing of regulatory
approvals;
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the
cost of establishing clinical and commercial supplies of our product
candidates and any products that we may
develop;
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the
effect of competing technological and market
developments;
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the
cost of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights;
and
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the
extent to which we acquire or invest in businesses, products and
technologies, although we currently have no commitments or agreements
relating to any of these types of
transactions.
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We do not currently have
any commitments for future external funding. Additional financing may not be
available on favorable terms, or at all. Our ability to obtain additional
financing may be negatively affected by the recent volatility in the financial
markets and the credit crisis, as well as the general downturn in the economy
and decreased consumer confidence. Even if we succeed in selling additional
securities to raise funds, our existing shareholders’ ownership percentage would
be diluted and new investors may demand rights, preferences or privileges senior
to those of existing shareholders. If we raise additional capital through
strategic alliance and licensing arrangements, we may have to trade our rights
to our technology, intellectual property or products to others on terms that may
not be favorable to us. If we raise additional capital through debt financing,
the financing may involve covenants that restrict our business
activities.
In addition, it is often
the case that the cost of pharmaceutical development can be significantly
greater than initially anticipated. This may be due to any of a large number of
possible reasons, some of which could have been anticipated, while others may be
caused by unpredictable circumstances. A significant increase in our costs would
cause the amount of financing that would be required to enable us to achieve our
goals to be likewise increased.
If we determine that we
need to raise additional funds and we are not successful in doing so, we may be
unable to complete the clinical development of some or all of our product
candidates or to seek or obtain FDA approval of our product candidates. Such
events could force us to discontinue product development, enter into a
relationship with a strategic partner earlier than currently intended, reduce
sales and marketing efforts or forego attractive business
opportunities.
We
are an early stage company with a history of losses. We expect to incur net
losses for the foreseeable future and we may never achieve or maintain
profitability.
We have incurred net
losses since our inception. For the years ended December 31, 2005, 2006 and
2007 we had net losses of approximately $3.5 million, $5.3 million and $5.4
million, respectively. Through September 30, 2008, we had an accumulated deficit
of approximately $25 million. To date, we have been, and expect to remain for
the foreseeable future, mostly in a research and development stage. Since our
inception, we have not generated revenue, except for modest revenue in 2006 and
2007 relating to two research and development collaboration and license
agreements. We have incurred substantial research and development expenses,
which were approximately $2.0 million, $4.1 million and $7.4 million for the
years ended December 31, 2005, 2006 and 2007, respectively. We expect to
continue to make, for at least the next several years, significant expenditures
for the development of products that incorporate our Aganocide compounds, as
well as continued research into the biological activities of our Aganocide
compounds, which expenditures are accounted for as research and development
expenses. We do not expect any of our current product candidates to be
commercialized within the next several years, if at all, except as may be
commercialized under our agreement with KCI, pursuant to which we granted them
the exclusive rights to develop, manufacture and commercialize NVC-101, as well
as other products containing hypochlorous acid as the principal active
ingredient, worldwide for use in wound care in humans, other than products or
uses intended for the eye, ear or nose. We expect to continue to incur
substantial losses for the foreseeable future, and we may never become
profitable. We anticipate that our expenses will continue to increase
substantially in the foreseeable future as we:
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conduct
pre-clinical studies and clinical trials for our product candidates in
different indications;
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conduct
pre-clinical studies and clinical trials for our product candidates in
different indications;
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develop,
formulate, manufacture and commercialize our product candidates either
independently or with partners;
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pursue,
acquire or in-license additional compounds, products or technologies, or
expand the use of our technology;
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maintain,
defend and expand the scope of our intellectual property;
and
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hire
additional qualified personnel.
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We will need to generate
significant revenues to achieve and maintain profitability. If we cannot
successfully develop, obtain regulatory approval for and commercialize our
product candidates, either independently or with partners, we will not be able
to generate such revenues or achieve or maintain profitability in the future.
Our failure to achieve and subsequently maintain profitability could have a
material adverse impact on the market price of our common
stock.
Our
limited operating history may make it difficult for you to evaluate our business
and to assess our future viability.
Our operations to date
have been limited to organizing and staffing our company, developing our
technology, researching and developing our compounds, and conducting preclinical
studies and early-stage clinical trials of our compounds. We have not
demonstrated the ability to succeed in achieving clinical endpoints, obtain
regulatory approvals, formulate and manufacture products on a commercial scale
or conduct sales and marketing activities. Consequently, any predictions you
make about our future success or viability are unlikely to be as accurate as
they could be if we had a longer operating history.
We
have very limited data on the use of our products in humans and will need to
perform costly and time consuming clinical trials in order to bring our products
to market.
Most of the data that we
have on our products is from in-vitro (laboratory) studies or in-vivo animal
studies. We have conducted limited human studies and will need to conduct Phase
I, II and III human clinical trials to confirm the in-vitro and in-vivo results
in order to obtain approval from the FDA of our compounds. Often, positive
in-vitro or in-vivo animal studies are not followed by positive results in human
clinical trials, and we may not be able to demonstrate that our products are
safe and effective for indicated uses in humans. In addition, for each
indication, we estimate that it will take between three and five years to
conduct the necessary clinical trials and will cost between $15 million and $30
million.
We
currently do not have any marketable products, and if we are unable to develop
and obtain regulatory approval for products that we develop, we may never
generate product revenues.
To date, our revenues have
been derived solely from two research and development collaboration and license
agreements. We have never generated revenues from sales of products and we
cannot guarantee that we will ever have marketable drugs or other products.
Satisfaction of all regulatory requirements applicable to our product candidates
typically takes many years, is dependent upon the type, complexity, novelty and
classification of the product candidates, and requires the expenditure of
substantial resources for research and development and testing. Before
proceeding with clinical trials, we will conduct pre-clinical studies, which
may, or may not be, valid predictors of potential outcomes in humans. If
pre-clinical studies are favorable, we will then begin clinical trials. We must
demonstrate that our product candidates satisfy rigorous standards of safety and
efficacy before we can submit for and gain approval from the FDA and other
regulatory authorities in the United States and in other countries. In addition,
to compete effectively, our products will need to be easy to use, cost-effective
and economical to manufacture on a commercial scale. We may not achieve any of
these objectives. We cannot be certain that the clinical development of any of
our current product candidates or any other product that we may develop in the
future will be successful, that they will receive the regulatory approvals
required to commercialize them, or that any of our other in-licensing efforts or
pre-clinical testing will yield a product suitable for entry into clinical
trials. Our commercial revenues from sales of products will be derived from
sales of products that we may not be commercially available for at least the
next several years, if at all.
We
have limited experience in developing drugs and medical devices, and we may be
unable to commercialize any of the products we develop.
Development and
commercialization of drugs and medical devices involves a lengthy and complex
process. We have limited experience in developing products and have never
commercialized, any of our product candidates. In addition, no one has ever
developed or commercialized a product based on our Aganocide compounds, and we
cannot assure you that it is possible to develop, obtain regulatory approval for
or commercialize any products based on these compounds or that we will be
successful in doing so.
Before we can develop and
commercialize any new products, we will need to expend significant resources
to:
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undertake
and complete clinical trials to demonstrate the efficacy and safety of our
product candidates;
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maintain
and expand our intellectual property
rights;
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obtain
marketing and other approvals from the FDA and other regulatory agencies;
and
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select
collaborative partners with suitable manufacturing and commercial
capabilities.
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The
process of developing new products takes several years. Our product development
efforts may fail for many reasons, including:
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the
failure of our product candidates to demonstrate safety and
efficacy;
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the
high cost of clinical trials and our lack of financial and other
resources; and
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our
inability to partner with firms with sufficient resources to assist us in
conducting clinical trials.
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Success
in early clinical trials often is not replicated in later studies, and few
research and development projects result in commercial products. At any point,
we may abandon development of a product candidate or we may be required to
expend considerable resources repeating clinical trials, which would eliminate
or adversely impact the timing for revenues from those product candidates. If a
clinical study fails to demonstrate the safety and effectiveness of our product
candidates, we may abandon the development of the product or product feature
that was the subject of the clinical trial, which could harm our
business.
Even if we develop
products for commercial use, these products may not be accepted by the medical
and pharmaceutical marketplaces or be capable of being offered at prices that
will enable us to become profitable. We cannot assure you that our products will
be approved by regulatory authorities or ultimately prove to be useful for
commercial markets, meet applicable regulatory standards, or be successfully
marketed.
The
price of our common stock may fluctuate substantially, which may result in
losses to our shareholders.
The stock prices of many
companies in the pharmaceutical and biotechnology industry have generally
experienced wide fluctuations, which are often unrelated to the operating
performance of those companies. The market price of our common stock is likely
to be volatile and could fluctuate in response to, among other
things:
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the
results of preclinical or clinical trials relating to our product
candidates;
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the
announcement of new products by us or our
competitors;
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announcement
of partnering arrangements by us or our
competitors;
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quarterly
variations in our or our competitors’ results of
operations;
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announcements
by us related to litigation;
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changes
in our earnings estimates, investors’ perceptions, recommendations by
securities analysts or our failure to achieve analysts’ earning
estimates;
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developments
in our industry; and
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General,
economic and market conditions, including the recent volatility in the
financial markets and decrease in consumer confidence and other
factors unrelated to our operating performance or the operating
performance of our competitors.
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The
volume of trading of our common stock may be low, leaving our common stock open
to risk of high volatility.
The number of shares of
our common stock being traded may be very low. Any shareholder wishing to sell
his/her stock may cause a significant fluctuation in the price of our stock. In
addition, low trading volume of a stock increases the possibility that, despite
rules against such activity, the price of the stock may be manipulated by
persons acting in their own self-interest. We may not have adequate market
makers and market making activity to prevent manipulation.
Future
sales of shares by our shareholders could cause the market price of our common
stock to drop significantly, even if our business is doing well.
As of the closing of our
initial public offering, we had 21,254,474 shares of common stock outstanding,
of which the 5,000,000 shares we sold in the offering may be resold in the
public market immediately. Of the remaining shares, 13,282,199 shares became
available for sale in the public market in April 2008, subject in some cases to
compliance with the volume and other limitations of Rule 144 and in other cases
subject to compliance with applicable Canadian requirements. Thereafter,
2,972,275 additional shares held by certain of our officers and directors will
become eligible for sale in the public market over the nine to 24 month period
after the closing of the initial public offering, as the shares are released
from lock-up agreements with the underwriters and applicable Canadian escrow
requirements.
In addition, at any time
and without public notice, the underwriters may release, at their discretion,
all or some of the securities subject to lock-up agreements with them, subject
to applicable regulatory requirements. As restrictions on resale end, the market
price of our stock could drop significantly if the holders of those shares sell
them or are perceived by the market as intending to sell them. These declines in
our stock price could occur even if our business is otherwise doing
well.
We
must implement additional and expensive finance and accounting systems,
procedures and controls in order to grow our business and organization and to
satisfy new reporting requirements, which will increase our costs and require
additional management resources.
We completed our initial
public offering, or IPO, in October 2007. As a public reporting company, we are
required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and
regulations of the SEC and Canadian securities regulatory authorities, including
expanded disclosure and accelerated reporting requirements and more complex
accounting rules. We are also required to comply with marketplace rules and the
heightened corporate governance standards of the Toronto Stock Exchange, or TSX,
and the American Stock Exchange, or AMEX. Compliance with Section 404 of
the Sarbanes-Oxley Act of 2002, which will be required by 2009, and other
requirements of the SEC, Canadian securities regulatory authorities, AMEX and
the TSX will increase our costs and require additional management resources. We
recently have begun upgrading our finance and accounting systems, procedures and
controls and will need to continue to implement additional finance and
accounting systems, procedures and controls as we grow our business and
organization and to satisfy reporting requirements. If we are unable to complete
the required Section 404 assessment as to the adequacy of our internal
control over financial reporting, if we fail to maintain or implement adequate
controls, or if our independent registered public accounting firm is unable to
provide us with an unqualified report as to the effectiveness of our internal
control over financial reporting as of the date of the first Annual Report on
Form 10-K for which compliance is required, our ability to obtain additional
financing could be impaired. In addition, investors could lose confidence in the
reliability of our internal control over financial reporting and in the accuracy
of our periodic reports filed with the SEC and with Canadian securities
regulatory authorities. A lack of investor confidence in the reliability and
accuracy of our public reporting could cause our stock price to
decline.
If
we do not maintain our current research collaboration with Alcon and KCI and
enter into additional collaborations, a portion of our funding may decrease and
inhibit our ability to develop new products.
We have entered into a
collaborative arrangement with Alcon, and we rely on Alcon for joint
intellectual property creation and for substantially all of our near-term
revenues. Under the agreement, we licensed to Alcon the exclusive rights (except
for certain retained marketing rights) to develop, manufacture and commercialize
products incorporating the Aganocide compounds for application in connection
with the eye, ear and sinus and for use in contact lens solutions. We have also
entered into a license agreement with KCI pursuant to which we granted to them
the exclusive rights to develop, manufacture and commercialize our NVC-101
compound worldwide for use in wound care in humans (other than products or uses
intended for the eye, ear or nose). We cannot assure you that our collaboration
with Alcon or KCI or any other collaborative arrangement will be successful, or
that we will receive the full amount of research funding, milestone payments or
royalties, or that any commercially valuable intellectual property will be
created, from these arrangements. If Alcon or KCI were to breach or terminate
its agreement with us or otherwise fail to conduct its collaborative activities
successfully and in a timely manner, the research contemplated by our
collaboration with them could be delayed or terminated and our costs of
performing studies may increase. We plan on entering into additional
collaborations and licensing arrangements. We may not be able to negotiate
additional collaborations on acceptable terms, if at all, and these
collaborations may not be successful. Our current and future success depends in
part on our ability to enter into successful collaboration arrangements and
maintain the collaboration arrangement we currently have. If we are unable to
enter into, maintain or extend successful collaborations, our business may be
harmed.
We
do not have our own manufacturing capacity, and we plan to rely on partnering
arrangements or third-party manufacturers for the manufacture of our potential
products.
We do not currently
operate manufacturing facilities for clinical or commercial production of our
product candidates. We have no experience in drug formulation or manufacturing,
and we lack the resources and the capabilities to manufacture any of our product
candidates on a clinical or commercial scale. As a result, we expect to partner
with third parties to manufacture our products or rely on contract manufacturers
to supply, store and distribute product supplies for our clinical trials. Any
performance failure on the part of our commercial partners or future
manufacturers could delay clinical development or regulatory approval of our
product candidates or commercialization of our products, producing additional
losses and reducing the potential for product revenues.
Our products, if developed
and commercialized, will require precise, high quality manufacturing. The
failure to achieve and maintain high manufacturing standards, including the
incidence of manufacturing errors, could result in patient injury or death,
product recalls or withdrawals, delays or failures in product testing or
delivery, cost overruns or other problems that could seriously harm our
business. Contract manufacturers and partners often encounter difficulties
involving production yields, quality control and quality assurance, as well as
shortages of qualified personnel. These manufacturers and partners are subject
to ongoing periodic unannounced inspection by the FDA and corresponding state
agencies to ensure strict compliance with current Good Manufacturing Practice
and other applicable government regulations and corresponding foreign standards;
however, we do not have control over third-party compliance with these
regulations and standards. If any of our manufacturers or partners fails to
maintain compliance, the production of our products could be interrupted,
resulting in delays, additional costs and potentially lost
revenues.
In addition, if the FDA or
other regulatory agencies approve any of our product candidates for commercial
sale, we will need to manufacture them in larger quantities. Significant
scale-up of manufacturing will require validation studies, which the FDA must
review and approve. If we are unable to successfully increase the manufacturing
capacity for a product, the regulatory approval or commercial launch of any
drugs may be delayed or there may be a shortage in supply and our business may
be harmed as a result.
We
may acquire other businesses or form joint ventures or in-license compounds that
could disrupt our business, harm our operating results, dilute your ownership
interest in us, or cause us to incur debt or significant expense.
As part of our business
strategy, we may pursue acquisitions of complementary businesses and assets, and
enter into technology or pharmaceutical compound licensing arrangements. We also
may pursue strategic alliances that leverage our core technology and industry
experience to enhance our ability to commercialize our product candidates and
expand our product offerings or distribution. We have no experience with respect
to acquiring other companies and limited experience with respect to the
formation of commercial partnering agreements, strategic alliances, joint
ventures or in-licensing of compounds. If we make any acquisitions, we may not
be able to integrate these acquisitions successfully into our existing business,
and we could assume unknown or contingent liabilities. If we in-license any
additional compounds, we may fail to develop the product candidates, and spend
significant resources before determining whether a compound we have in-licensed
will produce revenues. Any future acquisitions or in-licensing by us also could
result in significant write-offs or the incurrence of debt and contingent
liabilities, any of which could harm our operating results. Integration of an
acquired company also may require management resources that otherwise would be
available for ongoing development of our existing business. We may not identify
or complete these transactions in a timely manner, on a cost-effective basis, or
at all, and we may not realize the anticipated benefits of any acquisition,
technology license, strategic alliance or joint venture.
To finance any
acquisitions, we may choose to issue shares of our common stock as
consideration, which would dilute your interest in us. If the price of our
common stock is low or volatile, we may not be able to acquire other companies
for stock. Alternatively, it may be necessary for us to raise additional funds
for acquisitions by incurring indebtedness. Additional funds may not be
available on terms that are favorable to us, or at all.
Our
directors, executive officers and principal shareholders have significant voting
power and may take actions that may not be in the best interests of our other
shareholders.
As of September 30, 2008,
our officers and directors collectively controlled approximately 18.1% of our
outstanding common stock (and approximately 23.3% of our common stock when
including options held by them which were exercisable as of or within 60 days of
September 30, 2008). Furthermore, as of September 30, 2008, our largest
shareholder, a family trust established and controlled by Dr. Ramin Najafi,
our Chairman and Chief Executive Officer, beneficially owned 14.5% of our
outstanding common stock. As a result, Dr. Najafi can significantly
influence the management and affairs of our company and most matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing a change in control and might adversely affect
the market price of our common stock. This concentration of ownership may not be
in the best interests of our other shareholders.
We
depend on skilled and experienced personnel to operate our business effectively.
If we are unable to recruit, hire and retain these employees, our ability to
manage and expand our business will be harmed, which would impair our future
revenue and profitability.
Our success largely
depends on the skills, experience and efforts of our officers, especially our
Chief Executive Officer, Chief Financial Officer, Vice President of Research and
Development, Vice President of Clinical Research and Development, Senior Vice
President of Corporate and Business Development, and other key employees. The
efforts of each of these persons is critical to us as we continue to develop our
technologies and as we attempt to transition into a company with commercial
products. Any of our officers and other key employees may terminate their
employment at any time. The loss of any of our senior management team members
could weaken our management expertise and harm our ability to compete
effectively, develop our technologies and implement our business
strategies.
Our ability to retain our
skilled labor force and our success in attracting and hiring new skilled
employees will be a critical factor in determining whether we will be successful
in the future. Our research and development programs and collaborations depend
on our ability to attract and retain highly skilled scientists and technicians.
We may not be able to attract or retain qualified scientists and technicians in
the future due to the intense competition for qualified personnel among life
science businesses, particularly in the San Francisco Bay Area. We also face
competition from universities and public and private research institutions in
recruiting and retaining highly qualified scientific personnel. We have also
encountered difficulties in recruiting qualified personnel from outside the San
Francisco Bay Area, due to the high housing costs in the
area.
If
we fail to manage our growth effectively, we may be unable to execute our
business plan.
Our future growth, if any,
may cause a significant strain on our management, and our operational, financial
and other resources. Our ability to manage our growth effectively will require
us to implement and improve our operational, financial and management
information systems and to expand, train, manage and motivate our employees.
These demands may require the hiring of additional management personnel and the
development of additional expertise by management. Any increase in resources
devoted to research and product development without a corresponding increase in
our operational, financial and management information systems could have a
material adverse effect on our business, financial condition, and results of
operations.
It
may be difficult to recruit and retain independent members for our Board of
Directors.
The burdens being placed
on the members of a board of directors by applicable laws and regulations are
making it increasingly difficult to recruit qualified candidates to be members
of a board of directors of a public company. These same burdens may make it
increasingly difficult to retain members of our Board of Directors. If we are
unable to maintain a Board of Directors in which our shareholders have
confidence, this could have an adverse impact on shareholder confidence and on
the price of our stock.
If
our facilities become inoperable, we will be unable to perform our research and
development activities, fulfill the requirements under our collaboration
agreement and continue developing products and, as a result, our business will
be harmed.
We do not have redundant
laboratory facilities. We perform substantially all of our research, development
and testing in our laboratory located in Emeryville, California. Emeryville is
situated on or near active earthquake fault lines. Our facility and the
equipment we use to perform our research, development and testing would be
costly to replace and could require substantial lead time to repair or replace.
The facility may be harmed or rendered inoperable by natural or man-made
disasters, including earthquakes, flooding and power outages, which may render
it difficult or impossible for us to perform our research, development and
testing for some period of time. The inability to perform our research and
development activities may result in the loss of partners or harm our
reputation, and we may be unable to regain those partnerships in the future. Our
insurance coverage for damage to our property and the disruption of our business
may not be sufficient to cover all of our potential losses, including the loss
of time as well as the costs of lost opportunities, and may not continue to be
available to us on acceptable terms, or at all.
Obtaining
regulatory approval in the United States does not ensure we will obtain
regulatory approval in other countries.
We will aim to obtain
regulatory approval in the United States as well as in other countries. To
obtain regulatory approval to market our proposed products outside of the United
States, we and any collaborator must comply with numerous and varying regulatory
requirements in other countries regarding safety and efficacy. Approval
procedures vary among countries and can involve additional product testing and
additional administrative review periods. The time required to obtain approval
in other countries might differ significantly from that required to obtain FDA
approval. The regulatory approval process in other countries include all of the
risk associated with FDA approval as well as additional, presently unanticipated
risks. Regulatory approval in one country does not ensure regulatory approval in
another, but a failure or delay in obtaining regulatory approval in one country
may negatively impact the regulatory process in others. Failure to obtain
regulatory approval in other countries or any delay or setback in obtaining such
approval could have the same adverse effects associated with regulatory approval
in the United States, including the risk that our product candidates may not be
approved for all indications requested and that such approval may be subject to
limitations on the indicated uses for which the product may be marketed. In
addition, failure to comply with applicable regulatory requirements in other
countries can result in, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to renew marketing
applications and criminal prosecution.
If
we are unable to design, conduct and complete clinical trials successfully, we
will not be able to obtain regulatory approval for our products.
In order to obtain FDA
approval for some of our product candidates, we must submit to the FDA a New
Drug Application, or NDA, demonstrating that the product candidate is safe and
effective for its intended use. This demonstration requires significant research
and animal tests, which are referred to as preclinical studies, as well as human
tests, which are referred to as clinical trials.
Any clinical trials we
conduct or that are conducted by our partners may not demonstrate the safety or
efficacy of our product candidates. Success in pre-clinical testing and early
clinical trials does not ensure that later clinical trials will be successful.
Results of later clinical trials may not replicate the results of prior clinical
trials and pre-clinical testing. Even if the results of one or more of our
clinical trials are positive, we may have to commit substantial time and
additional resources to conducting further preclinical studies or clinical
trials before we can submit NDAs or obtain FDA approvals for our product
candidates, and positive results of a clinical trial may not be replicated in
subsequent trials.
Clinical trials are very
expensive and difficult to design and implement. The clinical trial process is
also time-consuming. Furthermore, if participating patients in clinical studies
suffer drug-related adverse reactions during the course of such trials, or if we
or the FDA believe that participating patients are being exposed to unacceptable
health risks, we will have to suspend or terminate our clinical trials. Failure
can occur at any stage of the trials, and we could encounter problems that cause
us to abandon clinical trials or to repeat clinical studies.
In
addition, the completion of clinical trials can be delayed by numerous factors,
including:
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delays
in identifying and agreeing on acceptable terms with prospective clinical
trial sites;
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slower
than expected rates of patient recruitment and
enrollment;
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increases
in time required to complete monitoring of patients during or after
participation in a trial; and
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unexpected need for
additional patient-related
data.
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Any of these delays, if
significant, could impact the timing, approval and commercialization of our
product candidates and could significantly increase our overall costs of drug
development.
Even if our clinical
trials are completed as planned, their results may not support our expectations
or intended marketing claims. The clinical trials process may fail to
demonstrate that our products are safe and effective for indicated uses. Such
failure would cause us to abandon a product candidate for some indications and
could delay development of other product candidates.
Government
agencies may establish usage guidelines that directly apply to our proposed
products or change legislation or regulations to which we are
subject.
Government usage
guidelines typically address matters such as usage and dose, among other
factors. Application of these guidelines could limit the use of products that we
may develop. In addition there can be no assurance that government regulations
applicable to our proposed products or the interpretation thereof will not
change and thereby prevent the marketing of some or all of our products for a
period of time or permanently. The FDA’s policies may change and additional
government regulations may be enacted that could prevent or delay regulatory
approval of our product candidates. We cannot predict the likelihood, nature or
extent of adverse government regulation that may arise from future legislation
or administrative action, either in the United States or in other
countries.
Our
product candidates may be classified as a drug or a medical device, depending on
the indication of use and prior precedent, and a change in the classification
may have an adverse impact on our revenues or our ability to obtain necessary
regulatory approvals.
Several potential
indications for our product candidates may be regulated under the medical device
regulations of the FDA administered by the Center for Devices and Radiological
Health or by the Center for Drug Evaluation and Research and the same physical
product may be regulated by one such agency for one indication and the other
agency for another indication. Our products may be classified by the FDA as a
drug or a medical device depending upon the indications for use or claims. For
example, for NVC-422, if the indication is for bladder lavage, we believe it
would be classified as a medical device, whereas we believe it would be
considered a drug when it is indicated for the prevention of urinary tract
infection. Similarly, the use of NVC-101 as a solution for cleansing and
debriding wounds would be considered as a medical device. In addition, the
determination as to whether a particular indication is considered a drug or a
device is based in part upon prior precedent. A reclassification by the FDA of
an indication from a device to a drug indication during our development for that
indication could have a significant adverse impact due to the more rigorous
approval process required for drugs, as compared to medical devices. Such a
change in classification can significantly increase development costs and
prolong the time for development and approval, thus delaying revenues. A
reclassification of an indication after approval from a drug to a device could
result in a change in classification for reimbursement. In many cases,
reimbursement for devices is significantly lower than for drugs and there could
be a significant negative impact on our revenues.
Conducting
clinical trials of our product candidates may expose us to expensive liability
claims, and we may not be able to maintain liability insurance on reasonable
terms or at all.
The risk of clinical trial
liability is inherent in the testing of pharmaceutical and medical device
products. If we cannot successfully defend ourselves against any clinical trial
claims, we may incur substantial liabilities or be required to limit or
terminate testing of one or more of our product candidates. Our inability to
obtain sufficient clinical trial insurance at an acceptable cost to protect us
against potential clinical trial claims could prevent or inhibit the
commercialization of our product candidates. Our current clinical trial
insurance covers individual and aggregate claims up to $3 million. This
insurance may not cover all claims and we may not be able to obtain additional
insurance coverage at a reasonable cost, if at all, in the future. In addition,
if our agreements with any future corporate collaborators entitle us to
indemnification against product liability losses and clinical trial liability,
such indemnification may not be available or adequate should any claim
arise.
If
product liability lawsuits are brought against us, they could result in costly
litigation and significant liabilities.
The product candidates we
are developing or attempting to develop will, in most cases, undergo extensive
clinical testing and will require regulated approval from the applicable
regulatory authorities prior to sale. However, despite all reasonable efforts to
ensure safety, it is possible that we or our collaborators will sell products
which are defective, to which patients react in an unexpected manner, or which
are alleged to have side effects. The manufacture and sale of such products may
expose us to potential liability, and the industries in which our products are
likely to be sold have been subject to significant product liability litigation.
Any claims, with or without merit, could result in costly litigation, reduced
sales, significant liabilities and diversion of our management’s time and
attention and could have a material adverse effect on our financial condition,
business and results of operations.
If a product liability
claim is brought against us, we may be required to pay legal and other expenses
to defend the claim and, if the claim is successful, damage awards may not be
covered, in whole or in part, by our insurance. We may not have sufficient
capital resources to pay a judgment, in which case our creditors could levy
against our assets. We may also be obligated to indemnify our collaborators and
make payments to other parties with respect to product liability damages and
claims. Defending any product liability claims, or indemnifying others against
those claims, could require us to expend significant financial and managerial
resources.
If
we receive regulatory approval for drug products that we develop, we and our
collaborators will also be subject to ongoing FDA obligations and continued
regulatory review, such as continued safety reporting requirements, and we and
our collaborators may also be subject to additional FDA post-marketing
obligations or new regulations, all of which may result in significant expense
and which may limit our ability to commercialize our potential drug
products.
Any regulatory approvals
that we receive for drug products that we develop may also be subject to
limitations on the indicated uses for which the drug may be marketed or contain
requirements for potentially costly post-marketing follow-up studies. The FDA
may require us to commit to perform lengthy Phase IV post-approval studies (as
further described below), for which we would have to expend additional
resources, which could have an adverse effect on our operating results and
financial condition. In addition, if the FDA approves any of our drug product
candidates, the labeling, packaging, adverse event reporting, storage,
advertising, promotion and record keeping for the drug will be subject to
extensive regulatory requirements. The subsequent discovery of previously
unknown problems with the drugs, including adverse events of unanticipated
severity or frequency, may result in restrictions on the marketing of the drugs
or the withdrawal of the drugs from the market. If we are not able to maintain
regulatory compliance, we may be subject to fines, suspension or withdrawal of
regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. Any of these events could prevent us from
marketing any products we may develop and our business could
suffer.
Failure
to obtain sufficient quantities of products and substances necessary for
research and development, pre-clinical trials, human clinical trials and product
commercialization that are of acceptable quality at reasonable prices or at all
could constrain our product development and have a material adverse effect on
our business.
We have relied and will
continue to rely on contract manufacturers for the foreseeable future to produce
quantities of products and substances necessary for research and development,
pre-clinical trials, human clinical trials and product commercialization. It
will be important to us that such products and substances can be manufactured at
a cost and in quantities necessary to make them commercially viable. At this
point in time, we have not attempted to identify, and do not know whether there
will be, any third party manufacturers which will be able to meet our needs with
respect to timing, quantity and quality for commercial production. In addition,
if we are unable to contract for a sufficient supply or required products and
substances on acceptable terms, or if we should encounter delays or difficulties
in our relationships with manufacturers, our research and development,
pre-clinical and clinical testing would be delayed, thereby delaying the
submission of product candidates for regulatory approval or the market
introduction and subsequent sales of products. Any such delay may have a
material adverse effect on our business, financial condition and results of
operations.
If
we use biological and hazardous materials in a manner that causes injury, we
could be liable for damages. Compliance with environmental regulations can be
expensive, and noncompliance with these regulations may result in adverse
publicity and potentially significant monetary damages and fines.
Our activities currently
require the controlled use of potentially harmful biological materials and other
hazardous materials and chemicals and may in the future require the use of
radioactive compounds. We cannot eliminate the risk of accidental contamination
or injury to employees or third parties from the use, storage, handling or
disposal of these materials. In the event of contamination or injury, we could
be held liable for any resulting damages, and any liability could exceed our
resources or any applicable insurance coverage we may have. Additionally, we are
subject, on an ongoing basis, to U.S. federal, state and local laws and
regulations governing the use, storage, handling and disposal of these materials
and specified waste products. The cost of compliance with these laws and
regulations might be significant and could negatively affect our operating
results. In addition, if more stringent laws and regulations are adopted in the
future, the costs of compliance with these new laws and regulations could be
substantial or could impose significant changes in our testing and production
process.
Because
our clinical development activities rely heavily on sensitive and personal
information, an area which is highly regulated by privacy laws, we may not be
able to generate, maintain or access essential patient samples or data to
continue our research and development efforts in the future on reasonable terms
and conditions, which may adversely affect our business.
As a result of our
clinical development, we will have access to very sensitive data regarding the
patients enrolled in our clinical trials. This data will contain information
that is personal in nature. The maintenance of this data is subject to certain
privacy-related laws, which impose upon us administrative and financial burdens,
and litigation risks. For instance, the rules promulgated by the Department of
Health and Human Services under the Health Insurance Portability and
Accountability Act, or HIPAA, creates national standards to protect patients’
medical records and other personal information in the United States. These rules
require that healthcare providers and other covered entities obtain written
authorizations from patients prior to disclosing protected health care
information of the patient to companies like NovaBay. If the patient fails to
execute an authorization or the authorization fails to contain all required
provisions, then we will not be allowed access to the patient’s information and
our research efforts can be substantially delayed. Furthermore, use of protected
health information that is provided to us pursuant to a valid patient
authorization is subject to the limits set forth in the authorization (i.e., for
use in research and in submissions to regulatory authorities for product
approvals). As such, we are required to implement policies, procedures and
reasonable and appropriate security measures to protect individually
identifiable health information we receive from covered entities, and to ensure
such information is used only as authorized by the patient. Any violations of
these rules by us could subject us to civil and criminal penalties and adverse
publicity, and could harm our ability to initiate and complete clinical studies
required to support regulatory applications for our proposed products. In
addition, HIPAA does not replace federal, state, or other laws that may grant
individuals even greater privacy protections. We can provide no assurance that
future legislation will not prevent us from generating or maintaining personal
data or that patients will consent to the use of their personal information,
either of which may prevent us from undertaking or publishing essential
research. These burdens or risks may prove too great for us to reasonably bear,
and may adversely affect our ability to function profitably in the
future.
We
may be subject to fines, penalties, injunctions and other sanctions if we are
deemed to be promoting the use of our products for non-FDA-approved, or
off-label, uses.
Our business and future
growth depend on the development, use and ultimate sale of products that are
subject to FDA regulation, clearance and approval. Under the U.S. Federal Food,
Drug, and Cosmetic Act and other laws, we are prohibited from promoting our
products for off-label uses. This means that we may not make claims about the
safety or effectiveness of our products and may not proactively discuss or
provide information on the use of our products, except as allowed by the
FDA.
There is a risk that the
FDA or other federal or state law enforcement authorities could determine that
the nature and scope of our sales and marketing activities may constitute the
promotion of our products for a non-FDA-approved use in violation of applicable
law. We also face the risk that the FDA or other regulatory authorities might
pursue enforcement based on past activities that we have discontinued or
changed, including sales activities, arrangements with institutions and doctors,
educational and training programs and other activities.
Government investigations
concerning the promotion of off-label uses and related issues are typically
expensive, disruptive and burdensome and generate negative publicity. If our
promotional activities are found to be in violation of applicable law or if we
agree to a settlement in connection with an enforcement action, we would likely
face significant fines and penalties and would likely be required to
substantially change our sales, promotion, grant and educational activities. In
addition, were any enforcement actions against us or our senior officers to
arise, we could be excluded from participation in U.S. government healthcare
programs such as Medicare and Medicaid.
If
we are unable to protect our intellectual property, our competitors could
develop and market products similar to ours that may reduce demand for our
products.
Our success, competitive
position and potential future revenues will depend in significant part on our
ability to protect our intellectual property. We rely on the patent, trademark,
copyright and trade secret laws of the United States and other countries, as
well as confidentiality and nondisclosure agreements, to protect our
intellectual property rights. We apply for patents covering our technologies as
we deem appropriate. We have registered the NovaBay trademark and design in the
United States, and the Aganocide trademark in the United States, the European
Community and Japan. We have allowed trademark applications in the United States
for AgaNase, NeutroPhase, and NovaBay. We have registered the NovaBay trademark
in Australia, the AgaNase trademark in Australia, the European Community, South
Korea and Japan, the NeutroPhase trademark in Australia, Ireland and the United
Kingdom, and have applications for these same trademarks pending in a number of
other foreign countries.
We have two issued
patents, one allowed patent application and six pending applications in the
United States. We also have two pending international applications filed
under the Patent Cooperation Treaty, one issued patent each in China, Hong Kong,
Israel, India, Mexico, and South Korea, and 46 pending foreign national
applications in Europe, Argentina, Australia, Brazil, Canada, China, Hong Kong,
Israel, India, Japan, South Korea, Mexico, Singapore, New Zealand, Taiwan and
South Africa.
The subject matter of our
patents and patent applications cover three key areas: methods relating to the
manufacture and use of NVC-101, composition of matter of the Aganocide compounds
and their compositions, and methods of treatment utilizing the Aganocide
compounds.
Our first issued patent in
the U.S. provides coverage for a method of treating burns or promoting wound
healing, tissue repair or tissue regeneration using a specific range of
formulations of NVC-101. This patent was issued on July 30, 2002 and
will expire in 2020. The second issued patent in the U.S. provides
coverage for a method of disinfecting open wounds and burns, promoting wound
healing and providing ocular disinfection using a specific range of formulations
of NVC-101. This patent was issued on July 1, 2008 and will expire in
2024.
The allowed application
claims the composition of matter for NVC-422 and other Aganocide
compounds. Once issued, it is expected to expire in
2026.
NovaBay aggressively
protects and enforces its patent rights worldwide. However, certain
risks remain. We cannot assure you that patents will issue from any
of our applications or, for those patents that do issue, that the claims will be
sufficiently broad to protect our proprietary rights, or that it will be
economically possible to pursue sufficient numbers of patents to afford
significant protection. In addition, we cannot assure you that any patents
issued to us or licensed or assigned to us by third parties will not be
challenged, invalidated, found unenforceable or circumvented, or that the rights
granted thereunder will provide competitive advantages to us. If we or our
collaborators or licensors fail to file, prosecute or maintain certain patents,
our competitors could market products that contain features and clinical
benefits similar to those of any products we develop, and demand for our
products could decline as a result. Further, although we have taken steps to
protect our intellectual property and proprietary technology, we cannot assure
you that third parties will not be able to design around our patents or, if they
do infringe upon our technology, that we will be successful or have sufficient
resources in pursuing a claim of infringement against those third parties. Any
pursuit of an infringement claim by us may involve substantial expense and
diversion of management attention.
We also rely on trade
secrets and proprietary know-how that we seek to protect by confidentiality
agreements with our employees, consultants and collaborators. We cannot assure
you that these agreements will be enforceable, will not be breached, that we
will have adequate remedies for any breach, or that our trade secrets and
proprietary know-how will not otherwise become known or be independently
discovered by competitors.
We operate in the State of
California. The laws of the State prevent us from imposing a delay
before an employee who may have access to trade secrets and proprietary know-how
can commence employment with a competing company. Although we may be able to
pursue legal action against competitive companies improperly using our
proprietary information, we may not be aware of any use of our trade secrets and
proprietary know-how until after significant damage has been done to our
company.
Furthermore, the laws of
foreign countries may not protect our intellectual property rights to the same
extent as the laws of the United States. If our intellectual property does not
provide significant protection against foreign or domestic competition, our
competitors, including generic manufacturers, could compete more directly with
us, which could result in a decrease in our market share. All of these factors
may harm our competitive position.
If
we are unable to protect the intellectual property and market exclusivity of
Aganocide compounds and products, thereby enabling other parties to
commercialize competing products, our ability to generate revenues from the sale
of our products may be limited or diminished.
We have filed patent
applications with claims directed to the Aganocide compounds and claims directed
to the method of using the Aganocide compounds with the United States Patent and
Trademark Office, or USPTO, and related international patent applications in
Argentina, Australia, Brazil, Canada, China, the European Patent Office, Hong
Kong, Israel, India, Japan, South Korea, Mexico, New Zealand, Singapore and
Taiwan. The first of these patents has issued in the U.S. However, we
cannot assure you that any additional patents will eventually be issued from the
U.S. or international patent applications. Should we be unable to obtain patents
with sufficiently broad scope to protect our proprietary rights, the interest of
potential partners for the development and commercialization of our Aganocide
products could be greatly diminished.
If no such patents are
issued or if they are issued but are later found invalid or unenforceable or are
not of sufficient scope, or after such patents expire in a given jurisdiction,
our competitors may produce generic products and make them available at a cost
that is cheaper than the price at which we, or our commercial partners, would
offer to sell any Aganocide products we develop.
Also, we do not have any
composition of matter patent directed to the NVC-101 composition. If a potential
competitor introduces a similar method of using NVC-101 with a similar
composition that does not fall within the scope of the method of treatment
claims, then we or a potential marketing partner would be unable to rely on the
allowed claims to protect its market position for the method of using the
NVC-101 composition, and any revenues arising from such protection would be
adversely impacted.
We
may be subject to damages resulting from claims that we or our employees have
wrongfully used or disclosed alleged trade secrets of their former
employers.
Some of
our employees may have been previously employed at universities or other
biotechnology or pharmaceutical companies, including our competitors or
potential competitors. Although no claims against us are currently pending, we
may be subject to claims that these employees or we have inadvertently or
otherwise used or disclosed trade secrets or other proprietary information of
their former employers. Litigation may be necessary to defend against these
claims. Even if we are successful in defending against these claims, litigation
could result in substantial costs and be a distraction to management. If we fail
in defending such claims, in addition to paying money damages, we may lose
valuable intellectual property rights or personnel. A loss of key research
personnel or their work product could hamper or prevent our ability to
commercialize product candidates, which could severely harm our
business.
The
pharmaceutical and biopharmaceutical industries are characterized by patent
litigation and any litigation or claim against us may cause us to incur
substantial costs, and could place a significant strain on our financial
resources, divert the attention of management from our business and harm our
reputation.
There has been substantial
litigation in the pharmaceutical and biopharmaceutical industries with respect
to the manufacture, use and sale of new products that are the subject of
conflicting patent rights. For the most part, these lawsuits relate to the
validity, enforceability and infringement of patents. Generic companies are
encouraged to challenge the patents of pharmaceutical products in the United
States because a successful challenger can obtain nine months of exclusivity as
a generic product under the Waxman-Hatch Act. We expect that we will rely upon
patents, trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop and maintain our competitive position and we
may initiate claims to defend our intellectual property rights as a result.
Other parties may have issued patents or be issued patents that may prevent the
sale of our products or know-how or require us to license such patents and pay
significant fees or royalties in order to produce our products. In addition,
future patents may issue to third parties which our technology may infringe.
Because patent applications can take many years to issue, there may be
applications now pending of which we are unaware that may later result in issued
patents that our products may infringe.
Intellectual property
litigation, regardless of outcome, is expensive and time-consuming, could divert
management’s attention from our business and have a material negative effect on
our business, operating results or financial condition. If such a dispute were
to be resolved against us, we may be required to pay substantial damages,
including treble damages and attorneys fees if we were to be found to have
willfully infringed a third party’s patent, to the party claiming infringement,
develop non-infringing technology, stop selling any products we develop, cease
using technology that contains the allegedly infringing intellectual property or
enter into royalty or license agreements that may not be available on acceptable
or commercially practical terms, if at all. Our failure to develop
non-infringing technologies or license the proprietary rights on a timely basis
could harm our business. Modification of any products we develop or development
of new products thereafter could require us to conduct additional clinical
trials and to revise our filings with the FDA and other regulatory bodies, which
would be time-consuming and expensive. In addition, parties making infringement
claims may be able to obtain an injunction that would prevent us from selling
any products we develop, which could harm our business.
If
bacteria develop resistance to Aganocide compounds, our revenues could be
significantly reduced.
Based on our understanding
of the hypothesis of the mechanism of action of our Aganocide compounds, we do
not expect bacteria to be able to develop resistance to Aganocide compounds.
However, we cannot assure you that one or more strains of bacteria will not
develop resistance to our compounds, either because our hypothesis of the
mechanism of action is incorrect or because a strain of bacteria undergoes some
unforeseen genetic mutation that permits it to survive. Since we expect lack of
resistance to be a major factor in the commercialization of our product
candidates, the discovery of such resistance would have a major adverse impact
on the acceptability and sales of our products.
If
physicians and patients do not accept and use our products, we will not achieve
sufficient product revenues and our business will suffer.
Even if the FDA approves
any product candidates that we develop, physicians and patients may not accept
and use them. Acceptance and use of our products may depend on a number of
factors including:
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perceptions
by members of the healthcare community, including physicians, about the
safety and effectiveness of our
products;
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published
studies demonstrating the cost-effectiveness of our products relative to
competing products;
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availability
of reimbursement for our products from government or healthcare payers;
and
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effectiveness
of marketing and distribution efforts by us and our licensees and
distributors, if any.
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The failure of any of our
products to find market acceptance would harm our business and could require us
to seek additional financing.
If
we are unable to develop our own sales, marketing and distribution capabilities,
or if we are not successful in contracting with third parties for these services
on favorable terms, or at all, revenues from any products we develop could be
disappointing.
We currently have no
internal sales, marketing or distribution capabilities. In order to
commercialize any product candidates approved by the FDA, we will either have to
develop such capabilities internally or collaborate with third parties who can
perform these services for us. If we decide to commercialize any products we
develop, we may not be able to hire the necessary experienced personnel and
build sales, marketing and distribution operations which are capable of
successfully launching new products and generating sufficient product revenues.
In addition, establishing such operations will take time and involve significant
expense.
If we decide to enter into
co-promotion or other licensing arrangements with third parties, we may be
unable to identify acceptable partners because the number of potential partners
is limited and because of competition from others for similar alliances with
potential partners. Even if we are able to identify one or more acceptable
partners, we may not be able to enter into any partnering arrangements on
favorable terms, or at all. If we enter into any partnering arrangements, our
revenues are likely to be lower than if we marketed and sold our products
ourselves.
In addition, any revenues
we receive would depend upon our partners’ efforts which may not be adequate due
to lack of attention or resource commitments, management turnover, change of
strategic focus, further business combinations or other factors outside of our
control. Depending upon the terms of our agreements, the remedies we have
against an under-performing partner may be limited. If we were to terminate the
relationship, it may be difficult or impossible to find a replacement partner on
acceptable terms, or at all.
If
we cannot compete successfully for market share against other companies, we may
not achieve sufficient product revenues and our business will
suffer.
The market for our product
candidates is characterized by intense competition and rapid technological
advances. If our product candidates receive FDA approval, they will compete with
a number of existing and future drugs, devices and therapies developed,
manufactured and marketed by others. Existing or future competing products may
provide greater therapeutic convenience or clinical or other benefits for a
specific indication than our products, or may offer comparable performance at a
lower cost. If our products are unable to capture and maintain market share, we
may not achieve sufficient product revenues and our business will
suffer.
We will compete for market
share against fully integrated pharmaceutical companies or other companies that
develop products independently or collaborate with larger pharmaceutical
companies, academic institutions, government agencies and other public and
private research organizations. In addition, many of these competitors, either
alone or together with their collaborative partners, have substantially greater
capital resources, larger research and development staffs and facilities, and
greater financial resources than we do, as well as significantly greater
experience in:
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developing
drugs and devices;
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conducting
preclinical testing and human clinical
trials;
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obtaining
FDA and other regulatory approvals of product
candidates;
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formulating
and manufacturing products; and
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launching,
marketing, distributing and selling
products.
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Our
competitors may:
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develop
and patent processes or products earlier than we
will;
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develop
and commercialize products that are less expensive or more efficient than
any products that we may develop;
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obtain
regulatory approvals for competing products more rapidly than we will;
and
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improve
upon existing technological approaches or develop new or different
approaches that render any technology or products we develop obsolete or
uncompetitive.
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We cannot assure you that
our competitors will not succeed in developing technologies and products that
are more effective than any developed by us or that would render our
technologies and any products we develop obsolete. If we are unable to compete
successfully against current or future competitors, we may be unable to obtain
market acceptance for any product candidates that we create, which could prevent
us from generating revenues or achieving profitability and could cause the
market price of our common stock to decline.
Our
ability to generate revenues from any products we develop will be diminished if
we fail to obtain acceptable prices or an adequate level of reimbursement for
our products from healthcare payers.
Our ability to
commercialize our product candidates will depend, in part, on the extent to
which health insurers, government authorities and other third-party payers will
reimburse the costs of products which may be developed by us or our partners. We
expect that a portion of our economic return from partnering arrangements with
pharmaceutical companies and other collaborators will be derived from royalties,
fees or other revenues linked to final sales of products that we or our partners
develop. Newly-approved pharmaceuticals and other products which are developed
by us or our partners will not necessarily be reimbursed by third-party payers
or may not be reimbursed at levels sufficient to generate significant sales.
Government and other third-party payers are increasingly attempting to contain
health care costs by limiting both coverage and the level of reimbursement for
new drugs or medical devices. Cost control initiatives such as these could
adversely affect our or our collaborators’ ability to commercialize products. In
addition, real or anticipated cost control initiatives for final products may
reduce the willingness of pharmaceutical companies or other potential partners
to collaborate with us on the development of new products.
Significant uncertainty
exists as to the reimbursement status of newly-approved healthcare products.
Healthcare payers, including Medicare, health maintenance organizations and
managed care organizations, are challenging the prices charged for medical
products or are seeking pharmacoeconomic data to justify formulary acceptance
and reimbursement practices. We currently have not generated pharmacoeconomic
data on any of our product candidates. Government and other healthcare payers
increasingly are attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement for drugs and medical devices, and by
refusing, in some cases, to provide coverage for uses of approved products for
disease indications for which the FDA has or has not granted labeling approval.
Adequate third-party insurance coverage may not be available to patients for any
products we discover and develop, alone or with collaborators. If government and
other healthcare payers do not provide adequate coverage and reimbursement
levels for our products, market acceptance of our product candidates could be
limited.
A
significant terrorist attack or threat of such attack may adversely impact our
ability to obtain financing.
A major terrorist attack,
the threat of such attack or other unforeseen events beyond our control, may
occur at a time when we need to raise additional financing. Closure or severe
perturbation of the financial markets as a result of such events may make such
financing impossible or unattractive and our plans may be seriously disrupted.
As a consequence, the progress of the company towards revenues or profits could
be significantly impaired.
Our
amended and restated articles of incorporation and bylaws and California law,
contain provisions that could discourage a third party from making a takeover
offer that is beneficial to our shareholders.
Anti-takeover provisions
of our amended and restated articles of incorporation, amended and restated
bylaws and California law may have the effect of deterring or delaying attempts
by our shareholders to remove or replace management, engage in proxy contests
and effect changes in control. The provisions of our charter documents
include:
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a
classified board so that only one of the three classes of directors on our
Board of Directors is elected each
year;
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elimination
of cumulative voting in the election of
directors;
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procedures
for advance notification of shareholder nominations and
proposals;
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the
ability of our Board of Directors to amend our bylaws without shareholder
approval; and
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the
ability of our Board of Directors to issue up to 5,000,000 shares of
preferred stock without shareholder approval upon the terms and conditions
and with the rights, privileges and preferences as our Board of Directors
may determine.
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In addition, as a
California corporation, we are subject to California law, which includes
provisions that may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of our company. Provisions of the
California Corporations Code could make it more difficult for a third party to
acquire a majority of our outstanding voting stock by discouraging a hostile
bid, or delaying, preventing or deterring a merger, acquisition or tender offer
in which our shareholders could receive a premium for their shares, or effect a
proxy contest for control of NovaBay or other changes in our
management.
We
have not paid dividends in the past and do not expect to pay dividends in the
future, and any return on investment may be limited to the value of our
stock.
We have never paid cash
dividends on our common stock and do not anticipate paying cash dividends on our
common stock in the foreseeable future. The payment of dividends on our common
stock will depend on our earnings, financial condition and other business and
economic factors affecting us at such time as our Board of Directors may
consider relevant. If we do not pay dividends, you will experience a return on
your investment in our shares only if our stock price appreciates. We cannot
assure you that you will receive a return on your investment when you do sell
your shares or that you will not lose the entire amount of your
investment.
We
may be considered a “foreign investment entity” which may have adverse Canadian
tax consequences for our Canadian investors.
Although we believe that
we are not currently a “foreign investment entity” within the meaning of the FIE
Tax Proposals (as defined in “Material Canadian Federal Income Tax
Considerations—Foreign Investment Entity Status”), no assurances can be given in
this regard or as to our status in the future. If we become a “foreign
investment entity” within the meaning of the FIE Tax Proposals, there may be
certain adverse tax consequences for our Canadian investors.
Because
we are a California corporation and the majority of our directors and officers
are resident in the United States, it may be difficult for investors in Canada
to enforce against us certain civil liabilities and judgments based solely upon
the securities laws of Canada.
We are organized under the
laws of California and our principal executive offices are located in
California. A majority of the directors and officers and the experts named in
this report reside principally in the United States and all or a substantial
portion of their assets and all or a substantial portion of our assets are
located in the United States. Consequently, it may be difficult for shareholders
to effect service of process within Canada upon us or our directors, officers or
experts who are residents of the United States. Furthermore, it may not be
possible to enforce against us or such directors, officers or experts, in the
United States, judgments obtained in Canadian courts, including judgments based
upon the civil liability provisions of applicable Canadian securities
law.
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Sales
of Unregistered Securities
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The
following is a summary of our recent transactions involving sales of our
securities that were not registered under the Securities Act of 1933, as
amended (the “Securities
Act”):
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(1) In April 2008, we
issued a two year warrant and a four year warrant to purchase an aggregate of
300,000 of common stock to PM Holdings Ltd. as part of our consideration for the
revision of the agreement dated February 13, 2007 with PM
Holdings. Under the terms of the original agreement, we agreed to pay
PM Holdings $28,000 per month through February 2010 for financial and investor
relations advisory services. The amendment to this agreement eliminates the
monthly cash payment obligation and instead provides for a one-time, upfront
cash payment of $264,000 and the issuance of warrants to purchase 300,000 of
common stocks at an exercise price of $4.00 per share.
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(2)
In July 2008, we issued total of 15,000 shares of common stock to the
principals of The Investor Relations Group as compensation for
services rendered to us.
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Purchases
of Equity Securities by the Issuer and Affiliated
Purchaser
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We did not repurchase any
of our outstanding equity securities during the fiscal quarter covered by this
report.
The
following exhibits are filed or furnished herewith or are incorporated herein by
reference to the location indicated.
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Exhibit No.
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Description
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Location
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3.1 |
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Amended
and Restated Articles of Incorporation
of
Registrant
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Exhibit
3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2007 as filed with the SEC on November 15,
2007
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3.2 |
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Amended
and Restated Bylaws of Registrant
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Exhibit
3.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2007 as filed with the SEC on November 15,
2007
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10.1 |
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Amended Lease Agreement |
Filed herewith
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31.1 |
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Certification
of the principal executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act
of
2002
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Filed herewith
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31.2 |
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Certification
of the principal financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Filed
herewith
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32.1 |
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Certification
of the principal executive officer pursuant to Section 906 of the
Sarbanes-Oxley Act
of
2002
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Furnished herewith
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32.2 |
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Certification
of the principal financial officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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Furnished
herewith
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Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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Date:
November 14, 2008
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NOVABAY
PHARMACEUTICALS, INC.
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/s/
Ramin Najafi
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Ramin
(“Ron”) Najafi
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President
and Chief Executive Officer
(duly
authorized officer)
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Date:
November 14, 2008
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/s/
Thomas J. Paulson
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Thomas
J. Paulson
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Chief
Financial Officer
(principal
financial officer)
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EXHIBIT
INDEX
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Exhibit No.
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Description
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Location
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3.1 |
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Amended
and Restated Articles of Incorporation
of
Registrant
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Exhibit
3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2007 as filed with the SEC on November 15,
2007
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3.2 |
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Amended
and Restated Bylaws of Registrant
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Exhibit
3.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2007 as filed with the SEC on November 15,
2007
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10.1 |
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Amended Lease Agreement |
Filed herewith
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31.1 |
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Certification
of the principal executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act
of
2002
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Filed
herewith
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31.2 |
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Certification
of the principal financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Filed
herewith
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32.1 |
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Certification
of the principal executive officer pursuant to Section 906 of the
Sarbanes-Oxley Act
of
2002
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Furnished
herewith
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32.2 |
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Certification
of the principal financial officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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Furnished
herewith
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