<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
------
Exchange Act of 1934. For the quarterly period ended September 30, 2000.
Transition report pursuant to Section 13 or 15(d) of the Securities
------
Exchange Act of 1934. For the transition period from
-------------------
to
----------------------.
Commission File Number 0-22987
VALENTIS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3156660
------------------------------------ ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
863A MITTEN RD., BURLINGAME, CA 94010
---------------------------------------- ----------------------------------
Address of principal executive offices) (Zip Code)
650-697-1900
--------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
------- -------
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 29,455,108 as of October 31, 2000.
Page 1 of 16
<PAGE>
VALENTIS, INC.
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
Page
<S> <C> <C>
ITEM 1: FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES 13
ABOUT MARKET RISK
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 14
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5: OTHER INFORMATION 14
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
Exhibit Index 16
</TABLE>
Page 2 of 16
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALENTIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
---- ----
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,702 $ 18,459
Short-term investments 14,681 14,661
Other receivables 2,156 1,346
Other current assets 704 732
--------- ---------
Total current assets 27,243 35,198
Property and equipment, net 8,608 9,328
Long-term investments 4,567 4,552
Goodwill and other intangible assets, net 9,623 11,056
Deposits and other assets 174 174
--------- ---------
$ 50,215 $ 60,308
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 218 $ 739
Accrued liabilities 3,442 4,126
Deferred revenue 5,107 5,267
Current portion of long-term debt 3,109 3,075
--------- ---------
Total current liabilities 11,876 13,207
Long-term debt 1,864 2,697
Commitments
Stockholders' equity:
Common stock 29 29
Additional paid-in capital 166,297 165,366
Deferred compensation (217) (247)
Accumulated other comprehensive income 314 177
Accumulated deficit (129,948) (120,921)
--------- ---------
Total stockholders' equity 36,475 44,404
--------- ---------
$ 50,215 $ 60,308
========= =========
</TABLE>
See accompanying notes
Page 3 of 16
<PAGE>
VALENTIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
2000 1999
---- ----
<S> <C> <C>
Collaborative research and development revenue $ 986 $ 1,185
Operating expenses:
Research and development 7,026 5,487
General and administrative 1,786 1,819
Acquired in-process research and development -- 14,347
Amortization of goodwill and other acquired intangibles 1,433 835
-------- ---------
Total operating expenses 10,245 22,488
-------- ---------
Loss from operations (9,259) (21,303)
Interest income 537 518
Interest expense and other (305) (245)
-------- ---------
Net loss $ (9,027) $ (21,030)
======== =========
Basic and diluted net loss per share $ (0.31) $ (0.89)
======== =========
Shares used in computing basic and diluted net loss per share 29,381 23,610
======== =========
</TABLE>
See accompanying notes
Page 4 of 16
<PAGE>
VALENTIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,027) $ (21,030)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation 799 961
Amortization of goodwill and other acquired intangibles 1,433 835
Amortization of deferred compensation 30 56
Purchase of in-process research and development with common stock -- 14,347
Changes in operating assets and liabilities:
Other receivables (810) 862
Other current assets 28 662
Deferred revenue (160) 162
Accounts payable (521) (1,399)
Accrued liabilities (684) (195)
Other 80 31
-------- ---------
Net cash used in operating activities (8,832) (4,708)
-------- ---------
Cash flows from investing activities:
Net cash acquired in acquisition -- 422
Purchase of property and equipment (79) (456)
Purchase of available-for-sale investments (7,622) --
Maturities of available-for-sale investments 7,644 3,602
-------- ---------
Net cash provided by (used in) investing activities (57) 3,568
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- --
Payments on long-term debt (799) (741)
Proceeds from issuance of common stock, net of repurchases 931 184
-------- ---------
Net cash provided by financing activities 132 (557)
-------- ---------
Net decrease in cash and cash equivalents (8,757) (1,697)
Cash and cash equivalents, beginning of period 18,459 4,785
-------- ---------
Cash and cash equivalents, end of period $ 9,702 $ 3,088
======== =========
Supplemental disclosure of cash flow information:
Interest paid $ 156 $ 203
======== =========
Tangible and intangible assets acquired for shares of common stock, net of cash
acquired and liabilities assumed $ -- $ 5,334
======== =========
</TABLE>
See accompanying notes
Page 5 of 16
<PAGE>
VALENTIS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by Valentis, Inc. ("Valentis" or the "Company") in
accordance with the rules and regulations of the Securities and Exchange
Commission for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information
and footnote disclosures normally included in our annual financial statements as
required by generally accepted accounting principles have been condensed or
omitted. The interim financial statements, in the opinion of management, reflect
all adjustments (consisting of normal recurring accruals) necessary for a fair
statement of the results for the interim periods ended September 30, 2000 and
1999. The balance sheet at June 30, 2000 is derived from the audited financial
statements at that date but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
The results of operations for the three months ended September 30, 2000 are
not necessarily indicative of the results of operations to be expected for the
fiscal year, although Valentis expects to incur a substantial loss for the year
ended June 30, 2001. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended June 30,
2000, which are contained in Valentis' Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
On August 27, 1999, Valentis acquired all the outstanding shares of
PolyMASC Pharmaceuticals plc ("PolyMASC"). The transaction was accounted for
under the purchase method of accounting.
The accompanying condensed consolidated financial statements include the
accounts of Valentis and its wholly owned subsidiary, PolyMASC. All significant
intercompany balances and transactions have been eliminated.
2. REVENUE RECOGNITION
Revenue related to collaborative research agreements with Valentis'
corporate partners is recognized over the related funding periods for each
contract. We are required to perform research and development activities as
specified in each respective agreement on a best-efforts basis. For some
contracts, we are reimbursed based on the costs associated with the number of
full-time equivalent employees working on each specific contract over the term
of the agreement. Research and development expenses under the collaborative
research agreements approximate or exceed the revenue recognized under such
agreements over the term of the respective agreements. Deferred revenue results
when we do not incur the required level of effort during a specific period in
comparison to funds received under the respective contracts or if additional
work may be required to satisfy a contract obligation. Revenue from milestone
and royalty payments is recognized as earned. Grant revenue is recognized as
related research and development expenses are incurred.
Included in deferred revenue at September 30, 2000, is $5.0 million
related to Roche Holdings Ltd. ("Roche") and $107,000 related to Boehringer
Ingelheim International GmbH ("Boehringer Ingelheim"). An additional $738,000
is expected to be earned under an agreement with Roche through February 2001.
The remainder of the deferred revenue will be earned either upon the
achievement of certain milestones or, under certain circumstances, through
the performance of additional contract research.
If we continue to meet the milestones for the development of gene medicines
under the Roche agreement, we may be entitled to payments of up to $8.3 million.
Upon successful completion of Phase II
Page 6 of 16
<PAGE>
clinical testing, we may elect either to receive up to 50 percent of potential
profits on worldwide sales by agreeing to share development and
commercialization expenses or to receive royalty payments based on worldwide
product sales.
3. NET LOSS PER SHARE
Basic earnings per share is computed by dividing income or loss applicable
to common stockholders by the weighted-average number of common shares
outstanding for the period, net of certain common shares outstanding which are
subject to continued vesting and Valentis' right of repurchase. Diluted earnings
per share include the dilutive effect of options, warrants and convertible
securities, if any. Diluted net loss per share has not been presented separately
as, given our net loss position for all periods presented, the result would be
antidilutive.
The following have been excluded from the calculation of net loss per share
at September 30, 2000 because the effect of inclusion would be antidilutive:
8,515 common shares outstanding that are subject to Valentis' right of
repurchase which expires ratably over four years, and options to purchase
2,840,650 shares of common stock at a weighted average price of $7.60 per share.
The repurchasable shares and options will be included in the calculation at such
time as the effect is no longer antidilutive, as calculated using the treasury
stock method for options.
A reconciliation of shares used in the calculation of basic and diluted and
pro forma basic and diluted net loss per share follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Net loss................................................................................. $ (9,027) $ (21,030)
======== =========
Basic and Diluted
Weighted average shares of common stock outstanding................................... 29,390 23,652
Common shares subject to repurchase................................................... (9) (42)
-------- ---------
Weighted average shares of common stock used in computing net loss per share.......... 29,381 23,610
======== =========
Basic and diluted net loss per share..................................................... $ (0.31) $ (0.89)
======== =========
</TABLE>
4. COMPREHENSIVE INCOME (LOSS)
Following are the components of comprehensive loss (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
Net loss........................................................... $(9,027) $(21,030)
Net unrealized gain (loss) on available-for-sale securities........ 57 (74)
Other.............................................................. 80 31
------- --------
Comprehensive income (loss) ....................................... $(8,890) $(20,073)
======= ========
</TABLE>
Page 7 of 16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. VALENTIS' ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" IN VALENTIS' ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED JUNE 30, 2000, FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
OVERVIEW
Valentis, Inc. is a leader in the field of biopharmaceutical delivery. We
develop a broad array of products, proprietary technologies and intellectual
property and apply our preclinical and early clinical development expertise to
create novel therapeutics and improved versions of existing marketed
biopharmaceuticals. Our core technologies include multiple gene delivery and
gene expression systems and PEGylation technologies designed to improve the
safety, efficacy and dosing characteristics of genes, proteins, peptides,
peptidomimetics, antibodies, replicating and non replicating viruses and
liposomes. We focus our research and development efforts in several therapeutic
areas including cardiovascular disorders, oncology, hematology and immunology.
Valentis has positioned itself to be the near-term beneficiary of genomics
research, a massive effort underway to understand the sequence and function of
the human genome. The first products being generated from genomics research are
biopharmaceuticals such as proteins, antibodies and gene medicines. Valentis has
a portfolio of delivery technologies that potentially allows us to develop new
products, create improved versions of currently marketed products and make these
biopharmaceuticals safer, more effective and more convenient for patients to
use.
In August 1999, Valentis acquired U.K.-based PolyMASC Pharmaceuticals plc.
Valentis has facilities in three locations: The Woodlands, Texas, which houses
personnel focused on preclinical research and development; London, England,
where PolyMASC Pharmaceuticals plc operates as a wholly owned subsidiary and
focuses on PEGylation technologies; and Burlingame, California, which is
Valentis' headquarters as well as the center for manufacturing and clinical
development.
We are developing delivery systems for biopharmaceuticals based on two
broad technology platforms: gene medicines and PEGylation technologies.
GENE MEDICINE TECHNOLOGIES
Each cell in the human body contains genes that code for the production of
proteins that directly and/or indirectly impact all of the body's functions.
Gene medicines are used to achieve production of therapeutic proteins in their
natural, most active form at specific sites in the body. Gene medicines are
typically administered by conventional pharmaceutical routes after being
reconstituted from single-vial, stable, lyophilized products. A gene is
delivered to target cells via a synthetic gene delivery system, and gives the
cells the instructions needed to produce a therapeutic protein that is intended
to correct, prevent or modulate genetic and acquired diseases.
Page 8 of 16
<PAGE>
PEGYLATION TECHNOLOGIES
PolyMASC's PEGylation technology allows for the gentle coupling of
polyethylene glycol ("PEG") molecules directly to proteins (protoMASC-TM-),
antibodies (antiMASC-TM-), viruses (viraMASC-TM-) and liposomes
(lipoMASC-TM-) in a manner that retains the biological activity of the
material. These PEG molecules can protect the biopharmaceutical from
degradation and attack by the immune system, resulting in products with
improved safety, efficacy and dosing profiles.
CORPORATE PARTNERS
Valentis itself, or through our PolyMASC subsidiary, currently has
corporate collaborations with:
- Roche Holdings Ltd. for cancer immunotherapeutics based on the IL-2
and IL-12, and Interferon-(alpha) genes;
- Eli Lilly & Co. to develop treatments for breast and ovarian cancer
using the BRCA-1 gene;
- Glaxo Wellcome plc to develop a treatment for cystic fibrosis using
the CFTR gene;
- Boehringer Ingelheim International GmbH, for the treatment of
rheumatoid arthritis with gene medicines;
- Invitrogen Corporation to sell Valentis' proprietary GeneSwitch-TM-
gene regulation system for use in research applications;
- Heska Corporation for a gene-based immunotherapeutic for cancer and
allergies in companion animals;
- Eurogene Ltd. for cardiovascular diseases using gene medicines and
Eurogene's collar delivery system;
- DSM Biologics and QIAGEN, N.V. for plasmid manufacturing;
- Onyx Pharmaceuticals, Inc. for a PEGylated virus-based cancer
therapeutic;
- Bayer Corporation, Inc. for a PEGylated Factor VIII;
- Flemington Pharmaceutical Corp. for a PEGylated oral insulin;
- Transkaryotic Therapies for the development of two PEGylated proteins;
and
- Viragen, Inc. for the development of a PEGylated interferon-alpha
(IFN-a) for treatment of hepatitis C.
To date, substantially all revenue has been generated by collaborative
research and development agreements from corporate partners, and only minimal
revenue has been generated from royalties on sales of the GeneSwitch-TM- gene
regulation system to the research market. Under the terms of our corporate
collaborations, Valentis generally receives research and development funding on
a quarterly basis in advance of associated research and development costs. We
expect that future revenue will be derived in the short-term from research and
development agreements and milestone payments, and in the long-term from
royalties on product sales.
We have incurred significant losses since inception and expect to incur
substantial losses for the foreseeable future, primarily due to the expansion of
our research and development programs and because we do not expect to generate
revenue from the sale of products in the foreseeable future, if at all. We
expect that operating results will fluctuate from quarter to quarter and that
such fluctuations may be substantial. As of September 30, 2000, Valentis'
accumulated deficit was approximately $129.9 million.
BUSINESS ACQUISITIONS
In August 1999, Valentis acquired PolyMASC. Under the terms of the
acquisition agreement, each outstanding ordinary share of PolyMASC was
exchanged, at a fixed exchange ratio of 0.209, for newly issued shares of common
stock of Valentis. This resulted in the issuance of approximately 4.4 million
Valentis shares valued at about $20.1 million based on an average Valentis stock
price of $4.56 at the date the transaction was announced. The purchase price
also included approximately $837,000 of transaction costs, for an aggregate
purchase price of $20.9 million. We are managing PolyMASC as a wholly owned
subsidiary of Valentis.
Page 9 of 16
<PAGE>
PolyMASC's research and development programs are in various stages of
preclinical development. Currently, none of the products utilizing PolyMASC's
proprietary technology has as yet entered any stage of human clinical testing or
has been approved for marketing. PolyMASC's strategy has been to develop and
commercialize products through alliances with pharmaceutical and biotechnology
companies.
The acquisition was accounted for as a purchase. A write-off of $14.3
million for in-process research and development acquired from PolyMASC was
included in Valentis' Consolidated Statements of Operations for the period
ending September 30, 1999. The intangible assets, consisting of assembled
workforce and goodwill, were assigned a value of $7.1 million and are being
amortized over their estimated useful lives of three years.
RESULTS OF OPERATIONS
REVENUE
Valentis' revenue was approximately $986,000 for the quarter ended
September 30, 2000 compared to approximately $1.2 million in the
corresponding quarter of 1999. Revenue contributions attributable to
milestone achievements, collaborative research and development performed
under our corporate collaborations, and grant revenues were (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
2000 1999
---- ----
<S> <C> <C>
Collaborative research and development revenue:
Roche............................................................ $ 554 $ 1,000
Boehringer Ingelheim............................................. 160 --
Eli Lilly........................................................ -- 88
Other............................................................ 138 97
------ -------
852 1,185
Grant revenue....................................................... 134 --
------ -------
Total revenue.................................................. $ 986 $ 1,185
====== =======
</TABLE>
Changes in revenue for the quarter ended September 30, 2000 compared to the
previous year are explained below:
- Revenue from Roche decreased by $460,000 for the quarter ended
September 30, 2000 compared to the corresponding period in 1999 due to
a contractual reduction in the amount of Research and Development
revenue recognized during the period.
- Recognition of revenue from Boehringer Ingelheim commenced under a
15-month collaboration signed in September 1999.
- Revenue and preclinical work under the Lilly agreement was completed
during fiscal year 2000.
- Other revenue reflects primarily the revenue generated by PolyMASC.
- Grant revenue increased due to the issuance of three new SBIR grants.
Included in deferred revenue at September 30, 2000 is $5.0 million related
to Roche and $107,000 related to Boehringer Ingelheim. An additional $738,000 is
expected to be earned under the Roche agreement through February 2001. The
remainder of the deferred revenue will be earned either upon the achievement of
certain milestones or, under certain circumstances, through the performance of
additional contract research. Deferred revenue results when the Company does not
incur the required level of effort during a specific period in comparison to
funds received under the respective contracts or if additional work may be
required to satisfy a contract obligation.
If Valentis continues to meet the milestones for the development of gene
medicines under an agreement with Roche, we may be entitled to payments of up
to $8.3 million. Upon successful completion of Phase II
Page 10 of 16
<PAGE>
clinical testing, Valentis may elect either to receive up to 50 percent of
potential profits on worldwide sales by agreeing to share development and
commercialization expenses or to receive royalty payments based on worldwide
product sales.
EXPENSES
Research and development expenses increased to approximately $7.0 million
for the quarter ended September 30, 2000 from approximately $5.5 million in
1999. The increases were primarily attributable to the additions of staff,
facilities and projects resulting from the merger with PolyMASC in August 1999,
as well as increased costs associated with additional clinical trial
expenditures. Valentis expects research and development expenses to continue to
increase as additional product candidates progress into and through clinical
trials.
General and administrative expenses remained flat at approximately $1.8
million for the quarter ended September 30, 2000 compared to the corresponding
period in 1999. In the future, we expect general and administrative expenses to
increase due to additional business development activities and to support
expanded research and development activities.
In September 1999, Valentis recorded $14.3 million of acquired in-process
research and development as part of the acquisition of PolyMASC.
For the three months ended September 30, 2000, Valentis amortized
approximately $1.4 million of the goodwill and other intangibles acquired in the
GeneMedicine and PolyMASC mergers compared to $835,000 for the corresponding
period of the prior year. The increase reflects a full quarter of amortization
in fiscal 2001 compared to a partial quarter in the prior year, as the merger
with PolyMASC occurred in August 1999.
INTEREST INCOME AND INTEREST EXPENSE AND OTHER, NET
Interest income and expense, and other, net was $232,000 for the quarter
ended September 30, 2000 compared to $273,000, for the corresponding quarter of
the prior year. The net decrease resulted primarily from lower interest expense
associated with lower financing balances and increased interest income from
higher investment interest rates. Other expenses increased in the period ending
September 30, 2000 compared to the corresponding period in the prior year due to
increases in property, use and state taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, Valentis had approximately $29.0 million in cash,
cash equivalents and investments compared to $37.7 million at June 30, 2000. Net
cash used in our operations for the quarter ended September 30, 2000 was $8.8
million compared to $4.7 million used in the corresponding quarter of 1999. Cash
was used primarily to fund increasing levels of research and development
including clinical trials, and general and administrative activities. Capital
expenditures were $79,000 for the quarter ended September 30, 2000 compared to
$456,000 used in the corresponding quarter of 1999. We expect our capital
expenditures in the future to be at higher levels to those expended in the
quarter ended September 30, 2000.
In October 1998, we entered into an equipment financing agreement with a
financing company. We financed $366,000 in equipment purchases under this
agreement structured as loans. The equipment loans are being repaid over 43
months at an interest rate of 10.1% and are secured by the related equipment. As
of September 30, 2000, the outstanding balance under this financing agreement
was $293,000. Valentis has fully utilized the borrowing capacity under this
agreement.
Page 11 of 16
<PAGE>
In May 1996, Valentis entered into an equipment financing agreement for up
to $2.7 million with a financing company. We financed $2.7 million in equipment
purchases under this agreement structured as loans. The equipment loans are to
be repaid over 48 months at interest rates ranging from 15.2% to 16.2% and are
secured by the related equipment. As of September 30, 2000, the outstanding
balance under this financing agreement was $748,000. Valentis has fully utilized
the borrowing capacity under this agreement.
In June 1995, Valentis established a line of credit for $8.0 million with a
commercial bank. In May 1998, in accordance with the terms of the agreement, the
entire balance was converted into a term loan at the bank's prime rate plus 0.5%
with payments due in equal monthly installments. At September 30, 2000, the
outstanding balance was $3.9 million. The loan is secured by tangible personal
property, other than the assets securing the equipment financing, accounts
receivable and funds on deposit. As a condition of the credit line, Valentis
must maintain a minimum cash and short-term investment balance of not less than
the prior two quarters net cash usage and Valentis' net worth must remain in
excess of 90% of the total principal drawn under the line of credit. Valentis
has fully utilized the borrowing capacity under this agreement.
Valentis anticipates that our cash, cash equivalents and investments,
committed funding from existing corporate collaborations and projected interest
income, will enable us to maintain our current and planned operations at least
through December 2001. However, we may require additional funding prior to such
time. Valentis' future capital requirements will depend on many factors,
including scientific progress in our research and development programs, the size
and complexity of such programs, the scope and results of preclinical studies
and clinical trials, the ability of Valentis to establish and maintain corporate
collaborations, the time and costs involved in obtaining regulatory approvals,
the time and costs involved in filing, prosecuting and enforcing patent claims,
competing technological and market developments, the cost of manufacturing
preclinical and clinical materials and other factors not within Valentis'
control. We are seeking additional collaborative agreements with corporate
partners and may seek additional funding through public or private equity or
debt financing. We may not be able to enter into any such agreements, however,
or if entered into, any such agreements may not reduce our funding requirements.
Additional financing to meet our funding requirements may not be available on
acceptable terms or at all.
If we raise additional funds by issuing equity securities, substantial
dilution to existing stockholders may result. However, insufficient funds may
require us to delay, scale back or eliminate some or all of our research or
development programs or to relinquish greater or all rights to products at an
earlier stage of development or on less favorable terms than we would otherwise
seek to obtain, which could materially adversely affect Valentis' business,
financial condition and results of operations.
Page 12 of 16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Valentis' exposure to market risk for changes in interest rates relates
primarily to our investment portfolio and long-term debt obligations. We
maintain a strict investment policy that ensures the safety and preservation of
our invested funds by limiting default risk, market risk, and reinvestment risk.
Our investments consist primarily of commercial paper, medium term notes, U.S.
Treasury notes and obligations of U.S. Government agencies and corporate bonds.
The table below presents notional amounts and related weighted-average interest
rates by year of maturity for Valentis' investment portfolio and long-term debt
obligations (in thousands, except percentages).
<TABLE>
<CAPTION>
2000 2001 Total
----------------- ----------------- -----------------
<S> <C> <C>
Cash equivalents
Fixed rate...................................... $ 7,739 -- $ 7,739
Average rate.................................... 6.58% -- 6.58%
Short-term investments
Fixed rate...................................... $ 7,037 -- $ 7,037
Average rate.................................... 5.38% -- 5.38%
Long-term investments
Fixed rate...................................... -- $12,211 $12,211
Average rate.................................... -- 6.97% 6.97%
----------------- ----------------- -----------------
Total investment securities........................ $14,776 $12,211 $26,987
Average rate....................................... 6.01% 6.97% 6.44%
</TABLE>
Valentis entered an equipment financing agreement in 1998 with a
commercial bank that matures in 2002. The outstanding balance as of September
30, 2000 was approximately $3.9 million at the bank's prime rate plus 0.5%.
Also, we have entered into equipment financing agreements with financing
companies that mature in 2002 and 2003 at fixed interest rates ranging from
10.1% to 16.2%. The outstanding balance as of September 30, 2000 was
approximately $1.0 million.
Page 13 of 16
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27 Financial Data Schedule (Exhibit 27 is submitted as an
exhibit only in the electronic format of this Quarterly
Report on Form 10-Q submitted to the Securities and
Exchange Commission).
b. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Valentis, Inc.
----------------
(Registrant)
Date: November 14, 2000 /s/ Benjamin F. Mcgraw III
--------------------------
Benjamin F. McGraw III
President, Chief Executive Officer, and
Chairman of the Board of Directors
Date: November 14, 2000 /s/ Bennet Weintraub
-------------------------
Bennet Weintraub
Chief Financial Officer and Vice President Finance
(Principal Financial and Accounting Officer)
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VALENTIS, INC.
EXHIBIT INDEX
27 Financial Data Schedule (Exhibit 27 is submitted as an exhibit only in the
electronic format of this Quarterly Report on Form 10-Q submitted to the
Securities and Exchange Commission).
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