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| NRGN > SEC Filings for NRGN > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
Forward-looking Statements
Some of the statements in this Annual Report on Form 10-K constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or future financial or business performance and are identified by words such as "may," "might," "will," "should," "expect," "scheduled," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential" or "continue" or the negative of such terms or other comparable terms. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in any forward-looking statements. In evaluating these statements, the reader should specifically consider various factors, including the risks outlined in Section 1A of this Form 10-K entitled "Risk Factors."
We wish to caution readers and others to whom forward-looking statements are addressed, that any such forward-looking statements are not guarantees of future performance and that actual results may differ materially from estimates in the forward-looking statements. We undertake no obligation to revise these forward-looking statements to reflect events or circumstances after the date hereof. Important factors that may cause results to differ from expectations include, for example:
§ risks inherent in discovery, research, development, testing, regulatory approval, production and marketing of any of our drug candidates;
§ risks deriving from in-licensing of drug candidates, acquisitions or business combinations;
§ our dependence on current or future corporate partners with respect to research and development funding, preclinical evaluation of drug candidates, human clinical trials of drug candidates, regulatory filings and manufacturing and marketing expertise;
§ risks deriving from collaborations, alliances, in-licensing or other transactions;
§ the risk that actual research and development costs and associated general and administrative costs may exceed budgeted amounts;
§ the risk that drug targets we pursue may prove to be invalid after substantial investments by us;
§ inability to obtain sufficient funds through future collaborative arrangements, equity or debt financings or other sources to continue the operation of the Company's business;
§ uncertainty regarding our patents and trade secrets and confidentiality agreements with collaborators, employees, consultants or vendors;
§ dependence upon third parties for the manufacture of our potential products and our inexperience in manufacturing if we establish internal manufacturing capabilities;
§ dependence on third parties to market potential products and our lack of sales and marketing capabilities;
§ unavailability or inadequacy of medical insurance or other third-party reimbursement for the cost of purchases of our products;
§ inability to attract or retain scientific, management and other personnel; and
§ risks associated with the fact that a majority of our common stock is held by a limited number of stockholders.
Overview
Since our inception in September 1987, we have been engaged in the research and development of drugs. We have not derived any revenue from product sales and have incurred, and expect to continue to incur, significant losses prior to deriving any such product revenues or earnings. Revenues to date have come from six collaborative research agreements, one license agreement and one technology transfer agreement.
The Report of the Independent Registered Public Accounting Firm to our audited financial statements for the period ended December 31, 2008 included in this Annual Report indicates that there are a number of factors that raise substantial doubt about our ability to continue as a going concern. Our current operating funds are insufficient to complete all currently planned clinical trials and commercialization of our product candidates, and therefore, we will need to obtain additional financing in order to complete our business plan.
During 2008, we restructured our research and development operations to eliminate our active discovery operations. This involved reducing our discovery research and administrative support staff by approximately 70 employees in February 2008 and by approximately 45 employees in early April 2008. (See Footnote 5 to our audited financial statements included herein.) This restructuring was part of an initiative to focus our efforts and resources on the development of our lead clinical candidate, aplindore, for the treatment of RLS and Parkinson's disease.
Also, during 2008, we incurred significant expenses in conducting clinical trials and other development activities, such as formulation testing and toxicology studies, for aplindore, our lead compound in our RLS and Parkinson's disease programs, and adipiplon, formerly NG2-73, our lead compound in our insomnia program. In February 2008, we commenced two Phase 2a studies with aplindore, our dopamine partial agonist, in Parkinson's disease and in RLS, and in mid-October 2008, we announced initial results of those two trials.
If aplindore progresses through additional Phase 2 and Phase 3 studies, clinical
trial and other development expenses related to these programs are expected to
significantly increase. The actual amount of future development expenses is
contingent on the results of ongoing studies. If studies progress, the cost of
these activities would require us to raise additional income, for example
through partnering with another firm to share costs or seeking new investments
from equity partners.
The preparation of our financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions and exercise judgment, which affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes estimates and exercises judgment in the valuation of marketable securities and investments, evaluation of investments and other assets for other-than-temporary impairment, accruals, revenue recognition, collaboration costs, income taxes and stock compensation. Actual amounts and outcomes could differ from those estimates.
We believe the following critical accounting policies affect management's more significant judgments and estimates used in the preparation of our financial statements:
Revenue Recognition
Periodically, we enter into collaborative research agreements that, among other things, generally provide for the funding to us of specified projects and the granting to our partners of certain development and commercialization rights related to potential discoveries. Revenue under these arrangements have typically included upfront non-refundable fees, ongoing payments for specified levels of staffing for research, milestone payments upon occurrence of certain events and royalties on product sales, if ever.
Revenue recognized from collaborative agreements is based upon the provisions of Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition, Emerging Issues Task Force, or EITF, Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, and EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
Non-refundable upfront license fees are recognized as revenue when there is a contractual right to receive such payment, the contract price is fixed or determinable, the collection of the resulting receivable is reasonably assured, and there are no further performance obligations under the license agreement. Multiple element arrangements are analyzed to determine whether the deliverables, which often include a license and performance obligations, can be separated or whether they must be accounted for as a single unit of accounting in accordance with EITF No. 00-21. The upfront license payment would be recognized as revenue upon the delivery of the license only if the license had standalone value and the fair value of the undelivered performance obligations could be determined. If the fair value of the undelivered performance obligations could be determined, such obligations would then be accounted for separately as performed. If the license is considered to either: 1) not have standalone value or 2) have standalone value but the fair value of any of the undelivered performance obligations is not determinable, the arrangement would then be accounted for as a single unit of accounting and the upfront license payments would be recognized as revenue over the estimated period of when the performance obligations are performed.
When it is determined that an arrangement should be accounted for as a single unit of accounting, we determine the period over which the performance obligations will be performed. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the performance obligations are expected to be completed. In addition, if we are involved in a steering committee as part of a multiple element arrangement that is accounted for as a single unit of accounting, an assessment is made as to whether the involvement in the steering committee constituted a performance obligation or a right to participate.
Collaborations may also contain substantive milestone payments. Milestone
payments are considered to be performance payments that are recognized upon
achievement of the milestone only if the milestone event is deemed to be
substantive after considering all of the following conditions:
§ the 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 payment 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 upfront license payment and the first milestone payment as well as between each subsequent milestone payment.
Determination as to whether a milestone meets the aforementioned conditions involves management's judgment. If any of the substantive milestone conditions are not met, the resulting payment would not be considered a substantive milestone and, therefore, the resulting payment would be considered part of the consideration for the single unit of accounting and be recognized as revenue as such performance obligations are performed.
Royalty revenue will be recognized upon the sale of related products, provided that the royalty amounts are fixed and determinable, collection of the related receivable is reasonably assured, and we have no remaining performance obligations under the collaborative agreement. If royalties are received when we have remaining performance obligations, the royalty payment would be attributed to the services being provided under the arrangement and, therefore, would be recognized as such performance obligations are performed.
In the financial statements, license fees revenue includes up-front, anniversary license payments and non-refundable fees under collaborative research agreements. Research and development revenue includes research funding for the Company's staffing on projects and milestone payments under collaborative agreements. Deferred revenue arises from the payments received for research and development to be conducted in future periods or for licenses of Neurogen's rights or technology where Neurogen has continuing obligations.
Research and Development Expenses
All research and development expenses are comprised of costs incurred in performing research and development activities including salaries and benefits, clinical trial and related clinical manufacturing costs, external research studies, laboratory supplies, and overhead facilities expenses. These costs are expensed as incurred.
We accrue costs for clinical trial activities based upon estimates of the services received and related expenses incurred that have yet to be invoiced by the contract research organizations, or CRO's, clinical study sites, laboratories, consultants, or other clinical trial vendors that perform the activities. Related contracts vary significantly in length and may be for a fixed amount, a variable amount based on actual costs incurred, capped at a certain limit, or for a combination of these elements. Activity levels are monitored through close communication with the CRO's and other clinical trial vendors, including detailed invoice and task completion review, analysis of expenses against budgeted amounts, analysis of work performed against approved contract budgets and payment schedules, and recognition of any changes in scope of the services to be performed. Certain CRO and significant clinical trial vendors provide an estimate of costs incurred but not invoiced at the end of each month for each individual trial. The estimates are reviewed and discussed with the CRO or vendor as necessary and are included in research and development expenses for the related period. For clinical study sites, which are paid periodically on a per-subject basis to the institutions performing the clinical study, we accrue an estimated amount based on subject screening and enrollment in each quarter. The estimates may differ from the actual amount subsequently invoiced, which may result in adjustment to research and development expense several months after the related services were performed.
Stock-Based Compensation
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123R, Share Based Payment, or SFAS No. 123R, using the modified prospective application and began recognizing compensation expense for the estimated fair value of all share-based payment awards. Under the modified
Prior to the adoption of SFAS No. 123R, we accounted for grants of stock options and restricted stock utilizing the intrinsic value method in accordance with Accounting Principles Board, or the APB, No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognized no employee compensation expense for the options when the option grants had an exercise price equal to the fair market value at the date of grant. We reported the disclosures as required under SFAS No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
We primarily grant stock options for a fixed number of shares to employees with an exercise price equal to the fair market value of the shares at the date of grant. Under SFAS No. 123R, stock-based compensation cost is measured based on the fair value of the award at the date of grant and is expensed over the service period of the award using the accelerated attribution model, which in most cases equals the vesting period. We have selected the Black-Scholes method to estimate the fair value of options. We have also issued restricted stock to key executives, which have been recorded as expense over the vesting period based upon the market price of the stock at date of grant.
We have in prior years granted stock option awards to consultants. As required by SFAS No. 123R, such grants were accounted for pursuant to 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.
Management also evaluated the assumptions that underlie the valuation of share-based payment awards. The following is a summary of some of the principal assumptions and classifications:
§ The expected term of options granted represents the period of time that option grants are expected to be outstanding. In 2008, the employee stock grants were granted with quarterly vesting for which no historical data existed. Given that the grants were made at a price that was unprecedently low and there was no history available for this type of vesting, the simplified method was used to determine the expected term of these grants. The expected term for Board of Directors grants was calculated based upon historical analysis.
§ Forfeitures of options are estimated based upon historical data and are adjusted based upon actual occurrences. The cumulative effect of restricted stock forfeitures was immaterial
§ In predicting expected volatility, assumptions were based solely upon historical volatilities of our stock over a period equal to the expected term of the related equity instruments. We rely only on historical volatility since future volatility is expected to be consistent with historical.
§ Under SFAS No. 123R, we have separated optionees into two groupings based upon historical analysis of the exercise behavior of those groupings: first, management and the Board of Directors, and, second, non-management employees; however, given our current use of the simplified method, the establishment of these groupings is not expected to have a significant impact on the calculation of expense.
§ The risk-free rate utilized when valuing share-based payment arrangements is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option being valued.
§ Management's selection of the valuation components, such as the Black-Scholes pricing method, interest rate, and volatility, are consistent with the approach utilized when reporting pursuant to the disclosure provisions of SFAS No. 123.
Marketable Securities
We classify our investment portfolio as available-for-sale securities as defined by the Financial Accounting Standards Board, or FASB, issued SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Marketable securities at December 31, 2008 and 2007 consisted of U.S. Treasury obligations, direct obligations of U.S. Government agencies and corporate debt securities. Maturities ranged from approximately one month to approximately four months at December 31, 2008, and from approximately one month to approximately 1 1/3 years at December 31, 2007. We have classified all marketable securities as current under Accounting Research Bulletin, or ARB, No. 43, Chapter 3, paragraph 4, Restatement and Revision of Accounting Research Bulletins. Such guidance indicates that a current classification is appropriate for resources such as marketable securities representing the investment of cash available for current operations.
In accordance with FASB Staff Position, or FSP, SFAS No. 115-1 and SFAS No. 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, we periodically review our marketable securities portfolio for potential other-than-temporary impairment and recoverability. Gross unrealized losses for all investments in an unrealized loss position totaled less than $0.1 million on an aggregate fair value of $7.0 million as of December 31, 2008. These securities were not in a continuous loss position for twelve months or more and matured at par value in January 2009. We believe that the decline in market values of these investments resulted primarily from rising interest rates and not credit quality. Based on the contractual terms and credit quality of these securities and current market conditions, we do not consider it probable that they will be settled by the issuer at a price less than the amortized cost of the investments. We do not consider these investments to be other-than-temporarily impaired at December 31, 2008 because of a variety factors, including:
§ we believe that we have the ability to hold these investments until a recovery of fair value, which may be at maturity;
§ we intend to hold these investments until a recovery of fair value, which may be at maturity; and
§ we believe the decline in market value is attributable to changes in interest rates and not credit quality.
Income Taxes
The liability method of SFAS No. 109, Accounting for Income Taxes, or SFAS No. 109, is used to account for income taxes. Deferred tax assets and liabilities are determined based on net operating loss carryforwards, research and development credit carryforwards, and differences between financial reporting and income tax bases of assets and liabilities. Deferred items are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization. Any subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets would be recorded as an income tax benefit in the Statement of Operations or a credit to Additional Paid-In Capital.
As of January 1, 2007, we adopted Financial Interpretation Number 48, or FIN 48, an interpretation of SFAS No. 109, which clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements.
The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition: The enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is measurement: A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
We believe that only one tax matter has uncertainty, and it relates to a potential refund from the state of Connecticut. Connecticut tax law provisions allow certain companies to obtain cash refunds at an exchange rate of 65% of their research and development credits in exchange for foregoing the carryforward of these credits into future tax years.
Due to "change in ownership" provisions of the Tax Reform Act of 1986, our utilization of our net operating loss and research and development credit carryforwards may be subject to an annual limitation in future periods. In early 2008, we updated our review of changes in ownership through a testing date of December 31, 2007 and determined that we did not have an ownership change subsequent to 2005 through December 31, 2007. In 2006, we reviewed our changes in ownership through a testing date of December 31, 2005 and determined that an ownership change occurred in 2005. This change of ownership did not have the effect of reducing the amount of net operating loss carryforwards but has limited approximately $1.1 million of the tax credits existing at the date of the ownership change that we may utilize in the taxable years following the change. We are currently in the process of updating our analysis of ownership changes through December 31, 2008.
Long-lived Assets
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS No. 144. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 addresses the financial accounting and reporting for impairment or disposal of long-lived assets. This statement provides that (a) an impairment loss should only be recognized if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows, and (b) the measurement of impairment loss should be based on the difference between the carrying amount and the fair value of the asset. It also provides that a long-lived asset (or asset group) should be tested for recoverability whenever events or changes in circumstances indicate that potential impairment has occurred. In addition, it provides for the use of probability-weighted cash flow estimates in the recoverability test.
We perform an annual review for possible impairment indicators. If any are noted, we then perform a more substantive review for potential impairment of the relevant long-lived asset (or asset group). We also assess the potential impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that we consider important and could trigger an impairment review include, among others, the following:
§ a significant adverse change in the extent or manner in which a long-lived asset is being used;
§ a significant adverse change in the business climate that could affect the value of a long-lived asset; and
§ a significant decrease in market value of assets.
If we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, it will compare the carrying value of the asset group to the . . .
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