Item
1
BUSINESS
Introduction
Apex
Bioventures Acquisition Corporation (the “Company”, “Apex”, “we”, or “us”) is a
blank check company organized under the laws of the State of Delaware on June
1,
2006. We were formed to acquire, through a merger, capital stock exchange,
asset
acquisition or other similar business combination, one or more domestic or
international assets or an operating business in the healthcare industry, which
may or may not constitute a business combination for accounting purposes (a
“business combination”). To date, our efforts have been limited to
organizational activities, our initial public offering, the search for a
suitable business combination and negotiation of the proposed merger with
Dynogen Pharmaceuticals, Inc., a Delaware corporation (“Dynogen”). As of the
date of this filing, we have not acquired any business operations and have
no
operations generating product revenue.
Our
executive offices are located at 18 Farm Lane, Hillsborough California, 94010,
and our telephone number at that location is (650) 344-3029. We do not currently
have a website and consequently do not make available materials we file with
or
furnish to the Securities and Exchange Commission. We will provide electronic
or
paper copies of such materials free of charge upon request.
Recent
Developments
Proposed
Merger Agreement with Dynogen Pharmaceuticals, Inc.
On
February 5, 2008, we and our wholly-owned subsidiary Apex Acquisition Sub,
Inc.,
(“Acquisition Sub”) (incorporated in January 2008), entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with Dynogen and Kate Bingham and
Michael Bigham, acting jointly as representatives of the holders of Dynogen
capital stock, options, warrants and other securities, pursuant to which
Acquisition Sub will merge with and into Dynogen and Dynogen will become our
wholly-owned subsidiary (the “Merger”). Dynogen is a clinical-stage
biopharmaceutical company focused on developing drugs to treat gastrointestinal
(GI) and genitourinary (GU) disorders and diseases, specifically irritable
bowel
syndrome (IBS), nocturnal gastroesophageal reflux disease (NGERD) and overactive
bladder (OAB). For some of these diseases, no approved treatment exists. The
few
treatment options approved by the U.S. Food and Drug Administration (FDA) have
limited efficacy and side effects that range from bothersome to life
threatening. Dynogen’s portfolio currently comprises the following three product
candidates for multiple indications:
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DDP733
for IBS with constipation (IBS-c)
.
Dynogen’s most advanced clinical-stage drug candidate, DDP733
(pumosetrag), is being developed for the treatment of IBS. Dynogen
is also
developing DDP733 as a treatment for NGERD.
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DDP225
for IBS with diarrhea (IBS-d)
.
Dynogen’s next clinical-stage drug candidate, DDP225, is being developed
for the treatment of IBS.
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DDP200
for OAB
.
Dynogen is developing DDP200 as a treatment for the non-incontinent
form
of OAB (OAB-Dry).
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Following
consummation of the Merger, it is anticipated that we will change our name
to
“Dynogen Pharmaceuticals, Inc.” and Dynogen will change its name to “Dynogen,
Inc.” Because we have no other operating business, following the Merger, Dynogen
will effectively become a public company. Dynogen’s offices are located at 52
Second Avenue, Waltham, Massachusetts 02451.
The
Merger Agreement provides that by virtue of the Merger, Dynogen stockholders
will initially receive an aggregate of approximately $98 million in shares
of
our common stock in exchange for all of the issued and outstanding capital
stock
of Dynogen. We are also assuming outstanding vested and unvested options and
certain warrants to purchase Dynogen capital stock, which shall become options
and warrants to purchase shares of our common stock on economically equivalent
terms. As permitted under the Merger Agreement, since the signing thereof,
Dynogen has incurred $5,000,000 of secured debt and may borrow up to an
additional $5,000,000 on or before April 30, 2008. In connection with this
secured debt, as permitted by the Merger Agreement, Dynogen issued warrants
which, following the Merger will be exercisable for shares of our common stock.
Dynogen is also permitted, under the Merger Agreement, to incur up to $25
million of bridge financing prior to the consummation of the Merger. At the
closing, the principal amount of any bridge notes issued by Dynogen in
connection with bridge financing is to be converted into (a) shares of our
common stock, plus (b) warrants to purchase shares of our common stock equal
to
25% of such principal amount. A per share value of $7.27 (representing the
volume weighted average price for the 20 trading days immediately preceding
the
date of the Merger Agreement) will be used to determine the number of shares
of
our common stock to be issued in exchange for Dynogen capital stock and bridge
notes and upon issuance of assumed options and warrants.
Under
the
Merger Agreement, holders of Dynogen’s capital stock and vested options will
also be entitled to receive success fees upon the satisfaction of certain
conditions, up to $46 million in shares of our common stock (again, based on
a
per share value of $7.27).
Dynogen
stockholders holding over 80% of the outstanding voting capital stock have
agreed, until the earlier of the consummation of the Merger or the termination
of the Merger Agreement, (a) not to sell or otherwise transfer, except to
certain permitted affiliate transferees who agree to be similarly bound, their
shares of Dynogen capital stock (or options, warrants or other rights to acquire
shares of Dynogen capital stock), and (b) to vote their shares of Dynogen
capital stock in favor of the Merger, the Merger Agreement and the related
agreements. These stockholders together control the only votes of the holders
of
any class or series of capital stock of Dynogen necessary to adopt the Merger
Agreement and to approve the Merger and the related agreements. Further, certain
key senior employees of Dynogen have agreed, through the 180th day following
the
consummation of the Merger, not to sell or otherwise transfer shares of our
common stock or options, warrants or other rights to acquire shares of our
common stock, except to certain permitted affiliate transferees who agree to
be
similarly bound. We have agreed to register for resale the shares of our common
stock issued in connection with the Merger to those Dynogen stockholders who
may, following the Merger, be considered our “affiliates” and who otherwise will
not be able to sell their shares of our common stock in the absence of an
exemption from registration.
A
more
complete description of the transactions described above, including exhibits
related thereto, such as the Merger Agreement, is included in a Form 8-K filed
on February 6, 2008 and will be included in our definitive proxy statement
to be
filed within 120 days of the end of our fiscal year.
Initial
Public Offering
The
registration statement for our initial public offering (the “Public Offering”)
was declared effective June 7, 2007. We consummated the Public Offering on
June
13, 2007 and received net proceeds of approximately $65,300,000, including
$1,800,000 of proceeds from the private placement (the “Private Placement”) sale
of 1,800,000 insider warrants to our stockholders prior to the Public Offering
(our “Initial Stockholders”). The warrants sold in the Private Placement are
identical to the warrants sold in the Public Offering, except that such warrants
are non-redeemable and can be exercised on a cashless basis as long as they
are
held by Initial Stockholders. In addition, subject to certain limited
exceptions, none of the warrants purchased by our Initial Stockholders are
transferable or salable until six months after the consummation of a business
combination.
Our
management has broad discretion with respect to the specific application of
the
net proceeds of the Public Offering. Upon the closing of the Public Offering
and
Private Placement, $67,330,000, including $2,070,000 of the underwriters’
deferred discounts and commissions, was deposited in a trust account (the “Trust
Account”) and invested in government securities. The Trust Account will be
maintained until the earlier of (a) the consummation of our first business
combination, and (b) our liquidation. As of February 29, 2008, the amount held
in the trust account, including $2,070,000 of underwriters’ deferred discounts
and commissions was approximately $68,014,846. The placing of funds in the
Trust
Account may not protect those funds from third party claims against us. Although
we have sought, and will continue to seek to have all vendors, prospective
target businesses and other entities we engage, execute agreements waiving
any
right, title, interest or claim of any kind in or to any monies held in the
Trust Account, there is no guarantee that all parties with which we do business
will execute such agreements. Our Initial Stockholders have agreed that they
will be personally liable, on a joint and several basis, to cover claims made
by
such third parties, but only if, and to the extent, the claims reduce the
amounts in the Trust Account available for payment to our public stockholders
in
the event of a liquidation and the claims are made by a vendor or service
provider for services rendered, or products sold, to us or by a prospective
acquisition target. However, our Initial Stockholders will not have any personal
liability as to any claimed amounts owed to a third party who executed a waiver
(including a prospective acquisition target) or the underwriters. We cannot
assure you, however, that the Initial Stockholders will be able to satisfy
those
obligations. The remaining net proceeds (not held in the Trust Account), along
with up to $1,600,000 in interest income net of taxes payable on such interest,
have been and will continue to be used to pay for business, legal, and
accounting due diligence on prospective acquisitions, continuing general and
administrative expenses, negotiation and consummation of the contemplated merger
with Dynogen.
The
Company, after signing a definitive agreement for a business combination, is
required to submit such transaction for stockholder approval. Accordingly,
we
are preparing a proxy statement soliciting such stockholder approval. In the
event that stockholders owning 30% or more of the shares sold in the Public
Offering vote against the business combination and exercise their conversion
rights described below, the business combination will not be consummated. All
of
the Initial Stockholders have agreed to vote their 2,156,250 founding shares
of
common stock, as well as any shares of common stock acquired in connection
with
or following the Public Offering, in accordance with the vote of the majority
in
interest of all of our other stockholders (“Public Stockholders”) with respect
to any business combination. After the consummation of a business combination,
these voting agreements will terminate.
After
a
business combination is approved and consummated, any Public Stockholder who
voted against the business combination may demand that we convert his, her
or
its shares to cash. The per share conversion price will equal the amount in
the
Trust Account, calculated as of two business days prior to the consummation
of
the proposed business combination, divided by the number of shares of common
stock held by Public Stockholders at the consummation of the Public Offering.
Public Stockholders holding up to 29.99% of the aggregate number of shares
owned
by all Public Stockholders may seek conversion of their shares in the event
of a
business combination. Such Public Stockholders are entitled to receive their
per
share interest in the Trust Account (subject to distributions for working
capital and amounts paid or accrued for taxes). Accordingly, a portion of the
net proceeds from the Public Offering (29.99% of the amount from the Public
Offering that was placed in the Trust Account) has been classified as common
stock subject to possible conversion on the accompanying December 31, 2007
balance sheet.
Our
Second Amended and Restated Certificate of Incorporation provides that we will
continue in existence only until 18 months from the date of the consummation
of
the Public Offering, or 24 months from the consummation of the Public Offering
if certain extension criteria have been satisfied. If we do not complete a
business combination by such date, our corporate existence will cease and we
will dissolve and liquidate for the purposes of winding up our affairs. In
the
event of liquidation, it is likely that the per share value of the residual
assets remaining available for distribution (including Trust Account assets)
will be less than the per share price in the Public Offering (assuming no value
is attributed to the Warrants contained in the Units sold in the Public
Offering).
On
June
8, 2007, our units commenced trading on the American Stock Exchange under the
symbol “PEX.U”. On June 20, 2007, our common stock and warrants commenced
trading separately on the American Stock Exchange under the symbols “PEX” and
“PEX.WS”, respectively
Executive
Officers of the Registrant as of December 31, 2007
Our
current executive officers are as follows:
Darrell
J. Elliott
,
age 61,
serves as our Chairman and Chief Executive Officer. Additionally, he has served
as one of our directors since inception. Mr. Elliott is currently Chief
Executive Officer and President of Isuma Strategies Inc., a strategic consulting
firm for private equity in the biopharma industry and Chairman and acting Chief
Executive Officer of ViRexx Medical Corp., a publicly traded biotechnology
company. He is also a director of Tekmira Pharmaceuticals Corporation, a
publicly traded biotechnology company.
K.
Michael Forrest
,
age 64,
serves as our President and Chief Operating Officer. Additionally, he has served
as one of our directors since our inception. Mr. Forrest is also Chairman of
Apex Bioventures, LLC, an investment and consulting company focusing on emerging
companies in the healthcare industry. He is a director of AVI BioPharma, Inc.
and Tekmira Pharmaceuticals Corporation, each a publicly traded biotechnology
company.
Gary
E. Frashier
,
age 71,
serves as our Chief Financial Officer, Secretary and as an Executive Vice
President. Additionally, he has served as one of our directors since our
inception. Mr. Frashier is also President and Principal of Management
Associates, a private firm that provides strategic consulting services to
entrepreneurial companies in the life sciences field. He is also a director
of
Tekmira Pharmaceuticals Corporation and Alseres Pharmaceuticals, Inc.,
each a publicly traded biotechnology company.
Our
Activities since Completion of our Initial Public Offering
Since
our
Public Offering we have not been, and as of December 31, 2007, we were not,
engaged in any substantive commercial business. Instead, our sole activities
have related to the search for a suitable business combination and the
negotiation of the proposed Merger with Dynogen. Following our Public Offering,
target business candidates were brought to our attention from various
unaffiliated sources, including investment bankers, venture capital funds,
private equity funds, consultants and other members of the financial community,
who present solicited or unsolicited proposals. Our officers and directors,
as
well as their affiliates, were also sources of target business candidates.
In
the process, we received nominations for more than 204 companies. Over a four
month period and following comprehensive discussions by our board of directors,
this list was systematically reduced to approximately 30, and then 20, and
eventually to approximately 10 companies on which we performed due diligence.
Subject to the requirement that our initial business combination must be with
a
target business with a fair market value that is at least 80% of our net assets
at the time of such acquisition, our management has virtually unrestricted
flexibility in identifying and selecting a prospective target business. In
evaluating a prospective target business (including Dynogen), our board of
directors considered, among other factors, the following:
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clinical
trial data and commercial product market
size;
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experience
and skill of management and availability of additional
personnel;
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future
capital requirements;
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competitive
position of the target company and its
products;
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barriers
to entry of product candidates;
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stage
of clinical development of products, processes or
services;
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degree
of current or potential market acceptance of the products, processes
or
services;
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proprietary
features and degree of intellectual property or other protection
of the
products, processes or services;
and
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FDA
correspondence and regulatory environment of the
industry.
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In
evaluating potential target companies, our board of directors considered a
wide
variety of factors in addition to those listed above. In light of the complexity
of those factors, our board of directors, as a whole, attempted to quantify
and
assign relative importance to the specific factors it considered in reaching
its
decision. Individual members of our board of directors gave different weight
to
different factors.
In
November 2007, following extensive due diligence, we began discussions in
earnest with Dynogen concerning a possible business combination. In selecting
Dynogen as a favored target, in addition to the above general considerations,
our board of directors considered the nature of Dynogen’s business and assets,
its current capitalization, the extent of the assets and liabilities to be
assumed and the factors below:
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Dynogen
has “multiple shots on goal” with three products in
development.
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Dynogen
has an advanced clinical pipeline of first-in-class treatments for
the GI
and GU markets, which we believe are also best-in-therapeutic for
these
areas.
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Dynogen
is developing product opportunities in potential billion dollar markets
where existing therapies have inadequate safety and
efficacy.
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Three
out of three of Dynogen’s clinical studies in 2007 yielded statistically
significant positive results.
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Dynogen
has an experienced management team with a strong track record of
getting
drugs to market.
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The
involvement of certain blue-chip biotech investors of
Dynogen.
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On
December 28, 2007, Apex and Dynogen entered into a non-binding term sheet and,
began the preparation and negotiation of definitive documents. As a result
of
the continuing downward trend of small cap public biotechnology companies and
market uncertainty, during the last week in January 2008, Apex and Dynogen
agreed to restructure the terms of the proposed Merger. This restructuring
resulted in the terms reflected in the Merger Agreement, including the up to
$46
million of success fees.
Any
costs
incurred with respect to the identification and evaluation of a prospective
target business with which a business combination is not ultimately completed
will result in a loss to us and reduce the amount of capital available to
otherwise complete a business combination. While we may pay fees or compensation
to third parties for their efforts in introducing us to a potential target
business, in no event, however, will we pay any of our officers, directors
or
Initial Stockholders or any entity with which they are affiliated any finder’s
fee or other compensation for services rendered to us prior to or in connection
with the consummation of a business combination. In addition, none of our
officers, directors or persons who were Initial Stockholders prior to our Public
Offering will receive any finder’s fee, consulting fees or any similar fees from
any person or entity in connection with any business combination involving
us
other than any compensation or fees that may be received for any services
provided following such business combination.
Fair
market value of target business
The
initial target business that we acquire must have a fair market value equal
to
at least 80% of our net assets at the time of such acquisition. The fair market
value of such business is determined by our board of directors based upon
standards generally accepted by the financial community, such as actual and
potential sales, earnings and cash flow and book value. We believe that the
proposed acquisition of Dynogen satisfies this standard.
Our
board
of directors has determined that the total aggregate purchase price for Dynogen
is at least equal to a fair market value of $98 million (assuming our common
stock is valued at $7.27 per share). This determination was based on an analysis
of Dynogen’s projected revenue and potential net profits and cash flow, as
compared to other businesses of a similar nature and the acquisition multiples
for other similar transactions in the biotechnology and pharmaceutical
industries that have recently been publicly announced or completed. The
estimated range of the fair market value exceeds $52.8 million, which is 80%
of
our net asset value of approximately $66.0 million as of December 31,
2007.
In
addition, our board obtained an opinion from RBC Capital Markets Corporation,
an
unaffiliated, independent investment banking firm which is a member of the
National Association of Securities Dealers, Inc. with respect to the
satisfaction of such criteria. The opinion obtained stated that fair market
value of Dynogen is at least equal to 80% of the net asset value of Apex and
that the consideration to be paid by us for Dynogen is fair to us from a
financial point of view.
The
terms
of the proposed Merger were determined based upon arms-length negotiations
between Apex and Dynogen, who had no prior dealings with each other. Under
the
circumstances, our board of directors believes that the total consideration
to
be paid appropriately reflects the fair market value of Dynogen. In light of
the
financial background and experience of several members of our board of
directors, and considering the opinion of RBC Capital Markets Corporation,
our
board of directors has determined that the fair market value of Dynogen is
greater than 80% of our net asset value.
Stockholder
approval of business combination
Prior
to
the completion of the proposed Merger with Dynogen, we will submit the
transaction to our stockholders for approval. In connection with seeking
stockholder approval of the proposed Merger, we are preparing and will furnish
our stockholders with proxy solicitation materials prepared in accordance with
the Securities Exchange Act of 1934 (the “Exchange Act”), which, among other
matters, will include a description of the operations of Dynogen and certain
required financial information regarding the business. We plan to schedule
a
meeting of our stockholders to approve the Merger and certain related
transactions.
In
connection with the vote required for the proposed Dynogen Merger, all Initial
Stockholders, have agreed to vote their 2,156,250 founding shares of common
stock, as well as any shares of common stock acquired in connection with or
following the Public Offering, in accordance with the vote of the majority
in
interest of all Public Stockholders. We will proceed with the Merger only if
a
majority of the shares of common stock voted by the Public Stockholders are
voted in favor of the Merger and Public Stockholders owning less than 30.0%
of
the shares sold in our Public Offering exercise their conversion rights.
Conversion
rights
At
the
time we seek stockholder approval of any business combination, we will offer
each Public Stockholder the right to have such stockholder’s shares of common
stock converted to cash if the stockholder votes against the business
combination and the business combination is approved and completed. The actual
per-share conversion price will be equal to the amount in the Trust Account,
inclusive of any interest but less amounts reserved or released to us for
working capital or taxes (calculated as of two business days prior to the
consummation of the proposed business combination), divided by the number of
shares sold in our Public Offering. Without taking into any account interest
earned on the Trust Account or taxes payable on such interest, the initial
per-share conversion price would be $7.81 (or $0.19 less than the Public
Offering per unit price of $8.00). An eligible stockholder may request
conversion at any time after the mailing to our stockholders of the proxy
statement and prior to the vote taken with respect to a proposed business
combination at a meeting held for that purpose, but the request will not be
granted unless the stockholder votes against the business combination and the
business combination is approved and completed. Any request for conversion,
once
made, may be withdrawn at any time up to the date of the meeting. It is
anticipated that the funds to be distributed to stockholders entitled to convert
their shares who elect conversion will be distributed promptly after completion
of a business combination. Public Stockholders who convert their stock into
their share of the Trust Account still have the right to exercise the warrants
that they received as part of the units in the Public Offering. We will not
complete any business combination if Public Stockholders owning 30% or more
of
the shares sold in our Public Offering exercise their conversion
rights.
Because
the initial per share conversion price is $7.81 per share (plus any interest
net
of taxes payable), which is lower than the $8.00 per unit price paid in our
Public Offering and which may be lower than the market price of our common
stock
on the date of the conversion, there may be a disincentive on the part of Public
Stockholders to exercise their conversion rights.
Liquidation
if no business combination
If
we do
not complete a business combination by June 13, 2009, we will be dissolved,
subject to stockholder approval, and will distribute to all of our Public
Stockholders, in proportion to their respective equity interests, an aggregate
sum equal to the amount in the Trust Account, inclusive of any interest (net
of
taxes payable), plus any remaining net assets. The Initial Stockholders have
waived their rights to participate in any liquidation distribution with respect
to shares of common stock owned by them immediately prior to our Public
Offering. If we dissolve, there will be no distribution from the Trust Account
with respect to our warrants, which will expire worthless.
If
we
were to expend all of the net proceeds of the Public Offering, other than the
proceeds deposited in the Trust Account, and without taking into account
interest earned on the Trust Account, the initial per-share liquidation price
would be $7.81 or $0.19 less than the Public Offering per unit price of $8.00.
The proceeds deposited in the Trust Account could, however, become subject
to
the claims of our creditors which could be prior to the claims of our Public
Stockholders. We cannot assure you that the actual per share liquidation price
will not be less than $7.81 plus interest (net of taxes payable, which taxes,
if
any, shall be paid from the Trust Account), due to claims of creditors. Although
we have sought (and will continue to seek) to have all vendors, prospective
target businesses and other entities we engage, execute agreements waiving
any
rights, title, interest or claim of any kind in or to monies held in the Trust
Account there is no guarantee that all parties with which we do business will
execute such agreements. Our Initial Stockholders have agreed pursuant to
agreements with us and Lazard Capital Markets LLC and Ladenburg Thalmann &
Co., Inc., the underwriters of the Public Offering, that they will be personally
liable on a joint and several basis, to cover claims made by such third parties
against the Trust Account. But only if and to the extent, the claims reduce
the
amounts available for payment to our Public Stockholders in the event of a
liquidation and the claims are made by a vendor or service provider for services
rendered or products sold to us or by a prospective acquisition target. However,
our Initial Stockholders will not have any personal liability as to any claimed
amounts owed to a third party who executed a waiver (including a prospective
acquisition target) or the underwriters. We cannot assure you, however, that
they would be able to satisfy those obligations.
If
we
complete the proposed Dynogen Merger or enter into another letter of intent,
an
agreement in principle or a definitive agreement to complete a business
combination prior to the expiration of 18 months after the consummation of
the
Public Offering, but are unable to complete the business combination within
the
18-month period, then we will have an additional six months in which to complete
the business combination contemplated by the letter of intent, agreement in
principle or definitive agreement. The Merger Agreement with Dynogen qualified
us to extend the period in which we may consummate a business combination for
this additional six-month period. If we are unable to do so by June 13, 2009,
we
will then liquidate. Upon notice from us, the trustee of the Trust Account
will
commence liquidating the investments constituting the Trust Account and will
turn over the proceeds to our transfer agent for distribution to our Public
Stockholders. We anticipate that our instruction to the trustee would be given
promptly after the expiration of the 24-month period.
Our
Public Stockholders shall be entitled to receive funds from the Trust Account
only in the event of our liquidation or, if we consummate a business
combination, to the extent that Public Stockholders vote against the business
combination and elect to convert their respective shares into cash. In no other
circumstances shall a stockholder have any right or interest of any kind to
or
in the trust fund. Voting against the business combination alone will not result
in conversion of a stockholder’s shares into a pro rata share of the Trust
Account. Such stockholder must have also exercised his, her or its conversion
rights described above.
Employees
As
of
December 31, 2007, we had three non-employee officers, all of whom are also
members of our board of directors, and no employees. These individuals are
not
remunerated for their services as officers, are not obligated to contribute
any
specific number of hours per week and devote only as much time as they deem
necessary to our affairs. The amount of time they devote will vary from time
to
time based on our activities and then current circumstances. Our officers have
devoted a significant amount of time to the proposed Merger with Dynogen. We
have not and do not intend to have any full time employees prior to the
consummation of a business combination.
Available
Information
We
are
subject to the information requirements of the Exchange Act. Therefore, we
file
periodic reports, proxy statements and other information with the SEC. Such
reports, proxy statements and other information may be obtained by visiting
the
Public Reference Room of the SEC at 100 F Street, NW, Washington, DC 20549.
You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site
(www.sec.gov) that contains reports, proxy and information statements and other
information regarding issuers that file electronically.
Item
1A.
RISK
FACTORS
An
investment in our securities involves a high degree of risk. You should consider
carefully all of the material risks described below, which refer to our business
and operations as of December 31, 2007, together with the other information
contained in this annual report on Form 10-K before making a decision to invest
in our securities. If any of the events described herein occur, our business,
financial conditions, and results of operations may be materially adversely
affected. In that event, the trading price of our securities could decline,
and
you could lose all or part of your investment.
RISKS
ASSOCIATED WITH OUR POTENTIAL BUSINESS
We
are a recently formed company with no operating history and, accordingly, you
will not have any basis on which to evaluate our ability to achieve our business
objective.
We
are a
recently formed company with no operating results to date. Since we do not
have
any operations or an operating history, you have no basis upon which to evaluate
our ability to achieve our business objective, which is to complete a business
combination. We will not generate any revenues or income (other than interest
income on the proceeds of our Public Offering) until, at the earliest, after
the
consummation of a business combination. On February 5, 2008, we entered into
the
Merger Agreement with Dynogen. We cannot assure you, however, that the Merger
contemplated thereby will be consummated.
Unlike
many other blank check companies, we allow up to approximately 29.99% of our
public stockholders to exercise their conversion rights. This higher threshold
will make it easier for us to consummate a business combination with which
you
may not agree, and you may not receive the full amount of your original
investment upon exercise of your conversion rights.
When
we
seek stockholder approval of a business combination (including the Dynogen
Merger), we will offer each Public Stockholder the right to have his, her or
its
shares of common stock converted to cash if the stockholder votes against the
business combination and the business combination is approved and consummated.
We will consummate the initial business combination only if the following two
conditions are met: (a) a majority of the shares of common stock voted by the
Public Stockholders are voted in favor of the business combination and (b)
Public Stockholders owning 30% or more of the shares sold in this offering
do
not vote against the business combination and exercise their conversion rights.
Most other blank check companies have a conversion threshold of 20%, which
makes
it more difficult for such companies to consummate their initial business
combination. Thus, because we permit a larger number of stockholders to exercise
their conversion rights, it will be easier for us to consummate an initial
business combination with a target business which you may believe is not
suitable for us, and you may not receive the full amount of your original
investment upon exercise of your conversion rights.
Under
Delaware law, our dissolution requires the approval of the holders of a majority
of our outstanding stock, without which we will not be able to dissolve and
liquidate and distribute our assets to our Public Stockholders.
We
will
promptly initiate procedures for our dissolution and the distribution of our
assets, including the funds held in the Trust Account, to our Public
Stockholders, if we do not effect a business combination by June 13, 2009.
We
will seek stockholder approval for our dissolution and plan for the distribution
of our assets. Upon the approval by our stockholders of our dissolution and
plan
for the distribution of our assets, we will liquidate our assets, including
the
Trust Account, and after reserving amounts sufficient to cover our liabilities
and obligations and the costs of dissolution and liquidation, distribute those
assets solely to our Public Stockholders. However, soliciting the vote of our
stockholders will require the preparation of preliminary and definitive proxy
statements, which will need to be filed with, and could be subject to the review
of, the SEC. This process could take up to several months. As a result, the
distribution of our assets to the Public Stockholders could be subject to a
considerable delay. Furthermore, we may need to postpone the stockholders
meeting, re-solicit our stockholders, or amend our plan for the distribution
of
our assets to obtain the required stockholder approval, all of which would
further delay the distribution of our assets and result in increased costs.
If
we are not able to obtain approval from a majority of our stockholders, we
will
not be able to dissolve and we will not be able to distribute funds from our
Trust Account to our Public Stockholders and these funds will not be available
for any other corporate purpose. In that event, we will continue to pursue
stockholder approval for our dissolution. We cannot assure you that our
stockholders will approve our dissolution in a timely manner or will ever
approve our dissolution. As a result, we cannot provide investors with
assurances of a specific timeframe for our dissolution and the distribution
of
our assets. If our stockholders do not approve a plan of dissolution and
distribution and the funds remain in the Trust Account for an indeterminate
amount of time, we may be considered to be an investment company.
If
we are forced to liquidate before a business combination, our Public
Stockholders will receive less than the $8.00 per unit Public Offering price
upon distribution of the Trust Account and our warrants will expire worthless.
If
we are
unable to complete a business combination and are forced to liquidate our
assets, the per-share liquidation will be less than $8.00 because of the
expenses of our Public Offering, our general and administrative expenses and
the
costs of seeking a business combination after our Public Offering. Furthermore,
there will be no distribution with respect to our outstanding warrants and,
accordingly, the warrants will expire worthless if we liquidate before the
completion of a business combination.
Because
there are numerous companies with a business plan similar to ours seeking to
effectuate a business combination, it may be more difficult for us to complete
a
business combination.
Based
upon publicly available information as of the date of this filing, approximately
152 similarly structured blank check companies have completed initial public
offerings since August 2003 and numerous others have filed registration
statements. Of these companies, only 46 companies have consummated a business
combination, while 24 other companies have announced they have entered into
a
definitive agreement for a business combination, but have not consummated such
business combination. Accordingly, there are approximately 73 blank check
companies with approximately $13.7 billion in trust that are seeking to carry
out a business plan similar to our business plan. While some of those companies
have specific industries in which they must complete a business combination,
a
number of them may consummate a business combination in any industry they
choose. We may therefore be subject to competition from these and other
companies seeking to consummate a business plan similar to ours which will,
as a
result, increase demand for privately-held companies to combine with companies
structured similarly to ours. Further, the fact that only 46 such companies
have
completed a business combination and 24 such companies have entered into a
definitive agreement for a business combination may be an indication that there
are only a limited number of attractive target businesses available to such
entities or that many privately-held target businesses may not be inclined
to
enter into business combinations with publicly held blank check companies like
us. We cannot assure you that we will be able to consummate the Dynogen Merger
and, if the Merger is not consummated, that we will be able to successfully
compete for another attractive business combination. Additionally, because
of
this competition, we cannot assure you that we will be able to effectuate a
business combination by June 13, 2009. If we are unable to find a suitable
target business by such time, we will be forced to liquidate.
If
third parties bring claims against us, the proceeds held in trust could be
reduced and the per share liquidation price received by Public Stockholders
will
be less than $7.81 per share.
Our
placing of funds in the Trust Account may not protect those funds from third
party claims against us. Pursuant to Delaware General Corporation Law Section
281(b), upon our dissolution we will be required to pay or make reasonable
provision to pay all claims and obligations of the corporation, including all
contingent, conditional, or unmatured claims. While we intend to pay those
amounts from our funds not held in trust, we cannot assure you those funds
will
be sufficient to cover such claims and obligations. Although we are obligated
to
seek to have all vendors, prospective target businesses or other entities with
which we do business waive any right, title, interest, or claim of any kind
in
or to any monies held in the Trust Account for the benefit of our Public
Stockholders, there is no guarantee that they will agree to such waivers, or
even if they agree to such waivers that they would be prevented from bringing
claims against the Trust Account, including but not limited to, fraudulent
inducement, breach of fiduciary responsibility, and other similar claims, as
well as claims challenging the enforceability of the waiver, in each case in
order to gain an advantage with a claim against our assets, including the funds
held in the Trust Account.
We
may issue shares of our capital stock or debt securities to complete a business
combination, which would reduce the equity interest of our stockholders and
likely cause a change in control of our ownership.
Our
Second Amended and Restated Certificate of Incorporation authorizes the issuance
of up to 60,000,000 shares of common stock, par value $0.0001 per share, and
1,000,000 shares of preferred stock, par value $0.0001 per share. As of the
date
hereof, there are 37,893,750 authorized but unissued shares of our common stock
available for issuance (after appropriate reservation for the issuance of shares
upon full exercise of our outstanding warrants and the underwriters warrants)
and all of the 1,000,000 shares of preferred stock available for issuance.
We
will issue a substantial number of additional shares of our common stock to
complete our proposed business combination with Dynogen, which
issuance:
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will
significantly reduce the equity interest of current investors in
our
securities;
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will
cause a change in control, which may affect, among other things,
our
ability to use our net operating loss carry forwards, if any;
and
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may
adversely affect prevailing market prices for our common
stock.
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If
the
proposed Dynogen Merger is not consummated, but we issue additional shares
of
our capital stock in an alternative business combination, the above are still
likely to occur. Additionally, the healthcare industry is capital intensive,
traditionally using substantial amounts of indebtedness to finance acquisitions,
capital expenditures and working capital needs. As permitted by the Merger
Agreement, Dynogen has incurred $5 million of secured indebtedness and may
incur
up to an additional $5 million of secured indebtedness. This indebtedness or
other indebtedness we incur to finance the purchase of assets or operations
through the issuance of debt securities, could result in:
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default
and foreclosure on our assets if our operating revenues after a business
combination prove insufficient to pay our debt
obligations;
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acceleration
of our obligations to repay the indebtedness even if we have made
all
principal and interest payments when due if the debt security contains
covenants that require the maintenance of certain financial ratios
or
reserves and any such covenant were breached without a waiver or
renegotiation of that covenant;
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our
immediate payment of all principal and accrued interest, if any,
if the
debt security is payable on demand; and our inability to obtain additional
financing, if necessary, if the debt security contains covenants
restricting our ability to obtain additional financing while such
security
is outstanding.
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Our
ability to effect a business combination and to execute any potential business
plan afterwards will be totally dependent upon the efforts of our key personnel,
some of whom may join us following a business combination and whom we would
have
only a limited ability to evaluate. It is also likely that some of our officers
and directors will resign upon the consummation of a business
combination.
Our
ability to effect a business combination will be totally dependent upon the
efforts of our key personnel. Under the Merger Agreement with Dynogen, four
of
our current directors will remain with us post-closing. Beyond this, the future
role of our key personnel following a business combination, however, cannot
presently be fully ascertained. In our proxy statement to our stockholders
soliciting approval for the proposed Merger with Dynogen, we will, pursuant
to
the terms of the Merger Agreement, nominate for election to our board of
directors, Lee R. Brettman, Dynogen’s Chief Executive Officer, and four of
Dynogen’s current directors. Following a business combination (with Dynogen or
otherwise), we may employ other personnel following the business combination.
While we intend to closely scrutinize any additional individuals we engage
after
a business combination, we cannot assure you that our assessment of these
individuals will prove to be correct. If we acquire a target business in an
all-cash transaction, it would be more likely that current members of management
would remain with us if they chose to do so. If a business combination were
structured as a merger whereby the stockholders of the target company were
to
control the combined company following a business combination (as the proposed
Merger with Dynogen is structured), it may be less likely that management would
remain with the combined company unless it was negotiated as part of the
transaction via the acquisition agreement, an employment agreement or other
arrangement. In making the determination as to whether current management should
remain with us following the business combination, management will analyze
the
experience and skill set of the target business’ management and negotiate as
part of the business combination that certain members of current management
remain if it is believed that it is in the best interests of the combined
company post-business combination. If management negotiates to be retained
post-business combination as a condition to any potential business combination,
such negotiations may result in a conflict of interest.
Our
officers and directors may allocate their time to other businesses thereby
causing conflicts of interest in their determination as to how much time to
devote to our affairs. This could have a negative impact on our ability to
consummate a business combination.
Our
officers and directors are not required to commit their full time to our
affairs, which may result in a conflict of interest in allocating their time
between our operations and other businesses. We do not intend to have any full
time employees prior to the consummation of a business combination. Each of
our
officers are engaged in several other business endeavors and are not obligated
to contribute any specific number of hours per week to our affairs.
If
our
officers’ other business affairs require them to devote more substantial amounts
of time to such affairs, it could limit their ability to devote time to our
affairs and could have a negative impact on our ability to consummate a business
combination.
Our
officers and directors are currently affiliated with entities engaged in
business activities similar to those intended to be conducted by us and
accordingly, may have conflicts of interest in determining which entity a
particular business opportunity should be presented to.
Prior
to
our selection of Dynogen as a potential target, none of our officers or
directors had any affiliation with Dynogen, nor did Dynogen create conflicts
of
interest as a potential acquisition candidate with respect to any other entity
with which any of our officers or directors are affiliated. However, our
officers and directors may in the future become affiliated with other entities,
including other “blank check” companies, engaged in business activities similar
to those intended to be conducted by us. Additionally, our officers and
directors may become aware of business opportunities which may be appropriate
for presentation to us as well as the other entities with which they are or
may
be affiliated. Further, certain of our officers and directors are currently
involved in other businesses that are similar to the business activities that
we
intend to conduct following a business combination. Due to these existing
affiliations, they have prior fiduciary obligations to present potential
business opportunities to those entities prior to presenting them to us which
could cause additional conflicts of interest. Accordingly, they have conflicts
of interest in determining to which entity a particular business opportunity
should be presented.
All
of our directors own shares of our common stock which will not participate
in
liquidation distribution and therefore they may have a conflict of interest
in
determining whether a particular target business is appropriate for a business
combination.
All
of
our directors own shares of our common stock which were issued prior to our
Public Offering, but have waived their right to receive distributions with
respect to those shares upon our liquidation if we are unable to complete a
business combination. Additionally, our officers and directors have purchased
an
aggregate of 1,800,000 warrants in a Private Placement. These warrants will
not
be exercisable or sold until the consummation of a business combination. The
shares and warrants owned by these directors will be worthless if we do not
consummate a business combination. The personal and financial interests of
these
directors may influence their motivation in identifying and selecting a target
business and completing a business combination in a timely manner. Consequently,
these directors’ discretion in identifying and selecting a suitable target
business may result in a conflict of interest when determining whether the
terms, conditions and timing of a particular business combination are
appropriate and in our stockholders’ best interest.
Our
officers and directors will not receive reimbursement for any out-of-pocket
expenses incurred by them to the extent that such expenses exceed the funds
available to us outside of the Trust Account unless the business combination
is
consummated and there are sufficient funds for reimbursement after such
consummation; therefore they may have a conflict of
interest.
Our
officers and directors will not receive reimbursement for any out-of-pocket
expenses incurred by them to the extent that such expenses exceed the funds
available to us outside of the Trust Account unless the business combination
is
consummated and there are sufficient funds for reimbursement after such
consummation. The financial interest of such persons could influence their
motivation in selecting a target business and thus, there may be a conflict
of
interest when determining whether a particular business combination is in the
stockholders’ best interest.
It
is probable that we will only be able to complete one business combination,
which will cause us to be solely dependent on a single business.
The
gross
proceeds from our Public Offering, including proceeds from the Private
Placement, were $70,800,000, of which $67,330,000 was placed in trust for use
in
consummating a business combination. Our initial business combination must
be
with a business with a fair market value of at least 80% of our net assets
at
the time of such acquisition or merger. Consequently, it is probable that we
will have the ability to complete only a single business combination, although
this may entail the simultaneous acquisition of several assets or closely
related operating businesses at the same time. We currently contemplate that,
following the Merger with Dynogen, the trust funds (after payment of costs
and
expenses incurred in connection with the Merger and other indebtedness) will
be
used to fund the operations of the combined company and not for an additional
acquisition. Accordingly, whether we consummate the contemplated Merger with
Dynogen or an alternative single business combination, the prospects for our
ability to effect our business strategy may be:
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solely
dependent upon the performance of a single business;
or
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dependent
upon the development or market acceptance of a single or limited
number of
products, processes or services.
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In
this
case, we will not be able to diversify our operations or benefit from the
possible spreading of risks or offsetting of losses, unlike other entities
which
may have the resources to complete several business combinations in different
industries or different areas of a single industry. Furthermore, since our
business combination may entail the simultaneous acquisition of several assets
or operating businesses at the same time and may be with different sellers,
we
will need to convince such sellers to agree that the purchase of their assets
or
businesses is contingent upon the simultaneous closings of the other
acquisitions.
We
may be unable to obtain additional financing, if required, to complete a
business combination or to fund the operations and growth of the target
business, which could compel us to restructure the transaction or abandon a
particular business combination.
If
the
net proceeds of our Public Offering and interest available to us for working
capital are insufficient to effect the contemplated Dynogen Merger (or, if
applicable, an alternative business combination), we will be required to seek
additional financing. We cannot assure you that such financing would be
available on acceptable terms, if at all. To the extent that additional
financing proves to be unavailable when needed to consummate a particular
business combination, we would be compelled to restructure the transaction
or
abandon that particular business combination and seek an alternative target
business candidate. In addition, if we consummate a business combination, we
may
require additional financing to fund the operations or growth of the target
business. The failure to secure additional financing could have a material
adverse effect on the continued development or growth of the target business.
None of our officers, directors or stockholders is required to provide any
financing to us in connection with or after a business combination.
Initial
Stockholders, including our officers and directors, control a substantial
interest in us and thus may influence certain actions requiring stockholder
vote.
Upon
consummation of our offering, our Initial Stockholders (including all of our
officers and directors or their affiliates collectively owned 20.0% of our
issued and outstanding shares of common stock, not including an aggregate of
1,800,000 warrants purchased in a Private Placement, which are not currently
exercisable. These warrants cannot be exercised or sold until after consummation
of a business combination.
Our
board
of directors is divided into three classes, each of which will generally serve
for a term of three years with only one class of directors being elected in
each
year. It is unlikely that there will be an annual meeting of stockholders to
elect new directors prior to the consummation of a business combination, in
which case all of the current directors will continue in office at least until
the consummation of the business combination. If there is an annual meeting,
as
a consequence of our “staggered” board of directors, initially only a minority
of the board of directors will be considered for election and persons who were
stockholders prior to our initial public offering, because of their ownership
position, will have considerable influence regarding the outcome. Accordingly,
our Initial Stockholders will continue to exert control at least until the
consummation of a business combination. In addition, such stockholders and
their
affiliates and relatives are not prohibited from purchasing our securities
in
the open market. If they do, we cannot assure you that our Initial Stockholders
will not have considerable influence upon the vote in connection with a business
combination.
Our
outstanding warrants may have an adverse effect on the market price of common
stock and make it more difficult to effect a business combination.
In
connection with the Public Offering and the Private Placement, we issued
warrants to purchase an aggregate of 10,425,000 shares of common stock. In
addition, we agreed to sell to the underwriters an option to purchase up to
an
aggregate of 450,000 units that, if exercised, would result in the issuance
of
an additional 450,000 units, comprised of 450,000 shares of common stock and
450,000 warrants (assuming the option is not exercised on a cashless basis).
These warrants become exercisable upon the consummation of our business
combination. To the extent we issue shares of common stock to effect a business
combination (as contemplated in connection with the Dynogen Merger), the
potential for the issuance of substantial numbers of additional shares upon
exercise of these warrants could make us a less attractive acquisition vehicle
in the eyes of a target business, as such securities, when exercised, will
increase the number of issued and outstanding shares of our common stock and
reduce the value of the shares issued to complete the business combination.
Accordingly, our warrants may make it more difficult to effect a business
combination or increase the cost of the target business. Additionally, the
sale,
or even the possibility of sale, of the shares underlying the warrants could
have an adverse effect on the market price for our securities or on our ability
to obtain future public financing. If and to the extent these warrants are
exercised, you may experience dilution to your holdings.
The
exercise of registration rights may have an adverse effect on the market price
of our common stock and the existence of certain of these rights may make it
more difficult to effect a business combination.
Our
Initial Stockholders are entitled to demand that we register the resale of
the
shares of common stock they acquired prior to our Public Offering at any time
after the date on which their shares are released from escrow, which, except
in
limited circumstances, will occur upon the expiration of one year after a
business combination is completed or any time after six months from the
consummation of a business combination, if the volume weighted average price
of
our common stock equals or exceeds $11.50 per share for any 20 trading days
within a 30 trading day period. Furthermore, they are entitled to demand the
registration of the securities underlying the 1,800,000 founder warrants at
any
time after the date on which the warrants are released from escrow, which,
except in limited circumstances, will occur upon the expiration of six months
after the completion of a business combination. If our Initial Stockholders
exercise their registration rights with respect to all of their shares of common
stock and warrants, then there will be an additional 3,956,250 shares of common
stock eligible for trading in the public market (assuming the warrants are
not
exercised on a cashless basis). Additionally, in connection with the proposed
Merger with Dynogen, we intend to grant certain registration rights to
stockholders of Dynogen who, following the Merger, will become our affiliates
and will not be able to sell their shares of our common stock without the
registration of such resale or an exemption therefrom. If the Merger with
Dynogen in consummated, we will endeavor to register the resale of the shares
of
our common stock issued to such affiliates as merger consideration. While we
cannot at this time ascertain the exact number of such shares, based on the
number of shares of Dynogen capital stock held by Dynogen’s stockholders as of
the signing of the Merger Agreement, we anticipate registering for resale
approximately 5.7 million shares of our common stock. The presence of these
additional securities eligible for trading in the public market may have an
adverse effect on the market price of our common stock.
The
existence of our Initial Stockholders’ registration rights may make it more
difficult to effect a business combination or increase the cost of the target
business, as the stockholders of the target business may be discouraged from
entering into a business combination with us or request a higher price for
their
securities as a result of these registration rights and the potential future
effect their exercise may have on the trading market for our common
stock.
The
American Stock Exchange may delist our securities from trading on its exchange
which could limit investors’ ability to make transactions in our securities and
subject us to additional trading restrictions.
Our
securities are listed on the American Stock Exchange, a national securities
exchange. We cannot assure you that our securities will continue to be listed
on
the American Stock Exchange in the future prior to a business combination.
Additionally, in connection with our business combination, it is likely that
the
American Stock Exchange may require us to file a new initial listing application
and meet its initial listing requirements as opposed to its more lenient
continued listing requirements. We cannot assure you that we will be able to
meet those initial listing requirements at that time.
If
the
American Stock Exchange de-lists our securities from trading on its exchange
and
we are not able to list our securities on another exchange or to have them
quoted on NASDAQ, our securities could be quoted on the OTC Bulletin Board,
or
“pink sheets”. As a result, we could face significant material adverse
consequences including:
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a
limited availability of market quotations for our
securities;
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a
determination that our common stock is a “penny stock” which will require
brokers trading in our common stock to adhere to more stringent rules
and
possibly resulting in a reduced level of trading activity in the
secondary
trading market for our securities;
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a
limited amount of news and analyst coverage for our company;
and
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a
decreased ability to issue additional securities or obtain additional
financing in the future.
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The
National Securities Markets Improvement Act of 1996, which is a federal statute,
prevents or preempts the states from regulating the sale of certain securities,
which are referred to as “covered securities”. Since we are listed on the
American Stock Exchange, our securities are covered securities. Although the
states are preempted from regulating the sale of our securities, the federal
statute does allow the states to investigate companies if there is a suspicion
of fraud, and if there is a finding of fraudulent activity, then the states
can
regulate or bar the sale of covered securities in a particular case. While
we
are not aware of a state having used these powers to prohibit or restrict the
sale of securities issued by blank check companies generally, certain state
securities regulators view blank check companies unfavorably and might use
these
powers, or threaten to use these powers, to hinder the sale of securities of
blank check companies in their states.
If
our common stock becomes subject to the SEC’s penny stock rules, broker-dealers
may experience difficulty completing customer transactions and trading activity
in our securities may be adversely affected.
If
at any
time our securities are no longer listed on the American Stock Exchange or
another exchange or quoted on NASDAQ and we have net tangible assets of
$5,000,000 or less and our common stock has a market price per share of less
than $5.00, transactions in our common stock may be subject to the “penny stock”
rules promulgated under the Exchange Act. Under these rules, broker-dealers
who
recommend such securities to persons other than institutional accredited
investors must:
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make
a special written suitability determination for the
purchaser;
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receive
the purchaser’s prior written agreement to a
transaction;
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provide
the purchaser with risk disclosure documents which identify certain
risks
associated with investing in “penny stocks” and which describe the market
for these “penny stocks” as well as a purchaser’s legal remedies;
and
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obtain
a signed and dated acknowledgment from the purchaser demonstrating
that
the purchaser has actually received the required risk disclosure
document
before a transaction in a “penny stock” can be
completed.
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If
our
common stock becomes subject to these rules, broker-dealers may find it
difficult to effectuate customer transactions and trading activity in our
securities may be adversely affected. As a result, the market price of our
securities may be depressed, and you may find it more difficult to sell our
securities.
If
we are deemed to be an investment company under the Investment Company Act
of
1940, our activities may be restricted which, among other problems, may make
it
difficult for us to complete a business combination. Such restrictions
include:
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restrictions
on the nature of our investments;
and
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restrictions
on the issuance of securities.
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In
addition, we may have imposed upon us burdensome requirements,
including:
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registration
as an investment company;
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adoption
of a specific form of corporate structure;
and
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reporting,
record keeping, voting, proxy and disclosure requirements and other
rules
and regulations.
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We
do not
believe that our anticipated principal activities will subject us to the
Investment Company Act of 1940. To this end, the proceeds held in trust may
only
be invested by the trust agent in “government securities” with specific maturity
dates, or in money market funds meeting specific requirements under the
Investment Company Act of 1940. By restricting the investment of the proceeds
to
these instruments, we intend to meet the requirements for the exemption provided
in Rule 3a-1 promulgated under the Investment Company Act of 1940. If we were
deemed to be subject to the act, compliance with these additional regulatory
burdens would require additional expense that we have not allotted
for.
Our
directors may not be considered “independent” under the policies of the North
American Securities Administrators Association, Inc.
All
of
our officers or directors own shares of our common stock, and no salary or
other
compensation will be paid to our officers or directors for services rendered
by
them on our behalf prior to or in connection with a business combination. We
believe that two members of our board of directors are “independent” as that
term is commonly used. However, under the policies of the North American
Securities Administrators Association, Inc., because our directors may receive
reimbursement for out-of-pocket expenses incurred by them in connection with
activities on our behalf such as identifying potential target businesses and
performing due diligence on suitable business combinations, state securities
administrators could take the position that such individuals are not
“independent.” If this were the case, they would take the position that we would
not have the benefit of independent directors examining the propriety of
expenses incurred on our behalf and subject to reimbursement. Additionally,
there is no limit on the amount of out-of-pocket expenses that could be incurred
and there will be no review of the reasonableness of the expenses by anyone
other than our board of directors, which would include persons who may seek
reimbursement, or a court of competent jurisdiction if such reimbursement is
challenged. Although we believe that all actions taken by our directors on
our
behalf will be in our best interests, whether or not two of them are deemed
to
be “independent,” we cannot assure you that this will actually be the case. If
actions are taken, or expenses are incurred that are actually not in our best
interests, it could have a material adverse effect on our business and
operations and the price of our common stock.
Our
stockholders may be held liable for claims by third parties against us to the
extent of distributions received by them in dissolution, regardless of when
such
claims are filed.
We
cannot
assure you that third parties will not seek to recover from the assets
distributed to our Public Stockholders any amounts owed to them by us. Under
the
DGCL, our stockholders could be liable for any claims against the corporation
to
the extent of distributions received by them in dissolution. The limitations
on
stockholder liability under the DGCL for claims against a dissolved corporation
are determined by the procedures that a corporation follows for distribution
of
its assets following dissolution. If we complied with the procedures set forth
in Sections 280 and 281(a) of the DGCL (which would include, among other things,
a 60-day notice period during which any third-party claims can be brought
against us, a 90-day period during which we may reject any claims brought,
an
additional 150-day waiting period before any liquidating distributions are
made
to stockholders, as well as review by the Delaware Court of Chancery) our
stockholders would have no further liability with respect to claims on which
an
action, suit or proceeding is begun after the third anniversary of our
dissolution. However, in accordance with our intention to liquidate and
distribute our assets to our stockholders as soon as reasonably possible after
dissolution, our Second Amended and Restated Certificate of Incorporation
provides that we will comply with Section 281(b) of the DGCL instead of Sections
280 and 281(a). Accordingly, our stockholders’ liability could extend to claims
for which an action, suit or proceeding is begun after the third anniversary
of
our dissolution.
We
may not be able to consummate a business combination within the required time
frame, in which case, we will be forced to dissolve and liquidate.
We
must
complete a business combination with one or more operating businesses with
a
collective fair market value equal to at least 80% of our net assets (excluding
deferred underwriting discounts and commissions of $2,070,000) by June 13,
2009.
If we fail to complete a business combination within the required time frame
we
will promptly initiate procedures to dissolve and liquidate our assets. We
may
not be able to close the proposed Merger with Dynogen or find a suitable
alternative target businesses within the required time frame. In addition,
our
negotiating position and our ability to conduct adequate due diligence on any
potential target may be reduced as we approach the deadline for the consummation
of a business combination.
RISKS
ASSOCIATED WITH THE HEALTHCARE INDUSTRY
Whether
we acquire domestic or international assets or operations, of which no
assurances can be given, our proposed business will be subject to numerous
risks, including the following:
If
we are unable to comply with governmental regulations affecting the healthcare
industry, it could negatively affect our operations.
There
is
extensive government regulation of many healthcare businesses as well as various
proposals at the federal government level to reform the healthcare system.
Changes to the existing regulatory framework and/or implementation of various
reform initiatives could adversely affect certain sectors of the healthcare
industry. If we are unable to adhere to these requirements, it could result
in
the imposition of penalties and fines against us, and could also result in
the
imposition of restrictions on our business and operations. For a more complete
discussion of the government regulations applicable to the healthcare industry,
please see the section entitled “Proposed Business—Government Regulations”
below.
If
we are required to obtain governmental approval of our products following a
business combination (as in the case of a Merger with Dynogen), the production
of our products could be delayed and we could be required to engage in a lengthy
and expensive approval process that may not ultimately be
successful.
Unanticipated
problems may arise in connection with the development of new products or
technologies, and many such efforts may ultimately be unsuccessful. In addition,
testing or marketing products may require obtaining government approvals, which
may be a lengthy and expensive process with an uncertain outcome. Delays in
commercializing products may result in the need to seek additional capital,
potentially diluting the interest of investors. These various factors may result
in abrupt advances and declines in the securities prices of particular companies
in the healthcare industry and, in some cases, may have broad effect on the
prices of securities of specific healthcare companies or of companies in the
healthcare industry generally.
The
healthcare industry is susceptible to significant liability exposure, especially
product liability claims. If liability claims are brought against us following
a
business combination, it could materially adversely affect our
operations.
Any
target business we acquire in the healthcare industry will be exposed to
potential liability risks (especially product liability risks) that are inherent
in the testing, manufacturing, marketing and sale of healthcare products and/or
the provisions of healthcare services. Product liability claims could delay
or
prevent completion of development programs, result in a recall of products
or
change in indications, or otherwise adversely affect our business, financial
condition or market prices of our securities. Any liability claim brought
against us following a business combination, with or without merit, could result
in:
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liabilities
that substantially exceed our liability insurance, which we would
then be
required to pay from other sources, if
available;
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an
increase of our liability insurance rates or the inability to maintain
insurance coverage in the future on acceptable terms, or at
all;
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withdrawal
of patients enrolled in our clinical trials, if
any;
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damage
to our reputation and the reputation of our products or services,
resulting in lower sales;
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regulatory
investigations that could require costly product recalls or
modifications;
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the
diversion of management’s attention from managing our
business.
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Additionally,
liability insurance is becoming increasingly expensive. Although we currently
maintain directors' and officers' liability insurance, as a result of increasing
costs, we may be unable to continue to maintain this coverage or to obtain
other sufficient insurance at a reasonable cost to protect us against losses
that could have a material adverse effect on our business. Our inability to
maintain or obtain liability insurance at an acceptable cost or to
otherwise protect against potential liability claims could prevent or inhibit
the commercialization of our products or services.
If
we are unable to obtain and maintain protection for the intellectual property
relating to our technologies and products or services following a business
combination, the value of our technology, products or services may be decreased
and our revenues may be likewise decreased.
Intellectual
property rights in the fields of biotechnology, pharmaceuticals, diagnostics
and
medical devise is highly uncertain and involves complex legal and scientific
questions. At the same time, the profitability of companies in these fields
generally depends on sustained competitive advantages and differentiation that
are based on intellectual property. Our success following a business combination
(including a business combination with Dynogen) will depend in large part on
our
ability to obtain and maintain protection in the United States and other
countries for the intellectual property covering or incorporated into our
technology products or services. We may not be able to obtain additional issued
patents relating to our technology, products or services. Even if issued,
patents may be challenged, narrowed, invalidated or circumvented, which could
limit our ability to stop competitors from marketing similar products or
services, limit the length of term of patent protection we may have for our
products or services, and expose us to substantial litigation costs and drain
our resources. Changes in either patent laws or in interpretation of patent
laws
in the Untied States and other countries may diminish the value of our
intellectual property or narrow the scope of our patent protection.
If
our prospective business infringes on the rights of third parties, we could
be
prevented from selling products, forced to pay damages, and may have to defend
against litigation.
In
the
event that the products, methods, processes or other technologies of our
prospective business are claimed to infringe the proprietary rights of other
parties, we could incur substantial costs and may be required to:
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obtain
licenses, which may not be available on commercially reasonable terms,
if
at all;
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abandon
an infringing product, process or
technology;
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redesign
our products, processes or technologies to avoid
infringement;
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stop
using the subject matter claimed in the patents held by
others;
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defend
litigation or administrative proceedings;
or
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Our
investments in healthcare-related companies may be extremely risky and we could
lose all or part of our investments.
An
investment in healthcare-related companies (including Dynogen) may be extremely
risky relative to an investment in companies operating in other sectors due,
in
part, to the following factors:
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early
stage healthcare companies typically have limited operating histories,
narrow research and development capabilities, narrow potential product
lines, are usually focused exclusively on development of potential
products and technologies, and, like Dynogen, most have not yet reached
the stage of product
commercialization;
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to
the extent that early stage healthcare companies are actually
commercializing products, they generally have smaller market shares
than
larger businesses, which tend to render them more vulnerable to
competitors’ actions and market
conditions;
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early
stage healthcare companies generally have less predictable operating
results, may from time to time be parties to litigation, may be engaged
in
rapidly changing businesses with product candidates subject to a
substantial risk of failure, and may require substantial additional
capital to support their operations, finance expansion or maintain
their
competitive position;
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because
many smaller healthcare companies tend to be privately owned, there
is
generally little publicly available information about these businesses;
therefore, we may not learn all of the material information we need
to
know regarding these businesses;
and
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many
small healthcare companies are more likely to depend on the management
talents and efforts of a small group of persons; therefore, the death,
disability, resignation or termination of one or more of these persons
could have a material adverse impact on the operations of any
healthcare-related company we may
acquire.
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Changes
in the healthcare industry are subject to various influences, each of which
may
affect our prospective business.
The
healthcare industry is subject to changing political, economic, and regulatory
influences. These factors affect the purchasing practices and operations of
healthcare organizations. Any changes in current healthcare financing and
reimbursement systems could cause us to make unplanned enhancements of our
prospective products, or result in delays or cancellations of orders, or in
the
revocation of endorsement of our prospective products by clients. Federal and
state legislatures have periodically considered programs to reform or amend
the
U.S. healthcare system at both the federal and state level. Such programs may
increase governmental regulation or involvement in healthcare, lower
reimbursement rates, or otherwise change the environment in which healthcare
industry participants operate. Healthcare industry participants may respond
by
reducing their investments or postponing investment decisions, including
investments in our prospective products.
Many
healthcare industry participants are consolidating to create integrated
healthcare systems with greater market power. As the healthcare industry
consolidates, competition to provide products to industry participants may
become even more intense, as will the importance of establishing a relationship
with each industry participant. These industry participants may try to use
their
market power to negotiate price reductions for our prospective products. If
we
were forced to reduce our prices, our operating results could suffer if we
could
not achieve corresponding reductions in our expenses.
Any
business we acquire will be subject to extensive government regulation. Any
business changes to the laws and regulations governing our prospective business,
or the interpretation and enforcement of those laws or regulations, could cause
us to modify our operations and could negatively impact our operating
results.
Our
prospective business will be extensively regulated by the federal government
and
any states in which we decide to operate. The laws and regulations governing
our
operations, if any, are generally intended to benefit and protect persons other
than our stockholders. The government agencies administering these laws and
regulations have broad latitude to enforce them. These laws and regulations
along with the terms of any government contracts we may enter into would
regulate how we do business, what products we could offer, and how we would
interact with the public. These laws and regulations, and their interpretations,
are subject to frequent change. Changes in existing laws or regulations, or
their interpretations, or the enactment of new laws or regulations could reduce
our revenue, if any, by:
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imposing
additional research requirements, thereby delaying the launch of
potential
new products and increasing
expenses;
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increasing
our liability;
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increasing
our administrative and other costs;
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increasing
or decreasing mandated benefits;
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forcing
us to restructure our relationships with providers or partners;
or
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requiring
us to implement additional or different programs and
systems.
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An
example of recently enacted and far-reaching legislation is the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, which will have
very significant effects in greatly increasing the level of federal expenditures
for prescription drugs. The new legislation alters the nature and degree of
reimbursement for drugs. Any analogous requirements applied to our prospective
products would be costly to implement and could affect our prospective
revenues.
The
current administration’s issuance of new regulations, its enforcement of the
existing laws and regulations, the states’ ability to promulgate stricter rules,
and uncertainty regarding many aspects of the regulations may make compliance
with any new regulatory landscape difficult. In order to comply with any new
regulatory requirements, any prospective business we acquire may be required
to
employ additional or different programs and systems, the costs of which are
unknown to us at this time. Further, compliance with any such new regulations
may lead to additional costs that we have not yet identified. We do not know
whether, or the extent to which, we would be able to recover our costs of
complying with any new regulations. Any new regulations and the related
compliance costs could have a material adverse effect on our
business.
If
we are unable to attract qualified healthcare professionals at reasonable costs,
it could limit our ability to grow, increase our operating costs and negatively
impact our business.
We
may
rely significantly on our ability to attract and retain qualified healthcare
professionals who possess the skills, experience and licenses necessary to
meet
the certification requirements and the requirements of applicable state and
federal governing bodies. We will compete for qualified healthcare professionals
with other healthcare organizations, universities, hospitals and government
organizations.
Our
ability to attract and retain such qualified healthcare professionals will
depend on several factors, including our ability to provide attractive
assignments and competitive benefits and wages. We cannot assure you that we
will be successful in any of these areas.
We
may be dependent on payments from Medicare and Medicaid. Changes in the rates
of
methods governing these payments for our prospective products, or delays in
such
payments, could adversely affect our prospective
revenue.
Any
reductions in amounts paid by government programs for our prospective products
or changes in methods or regulations governing payments would adversely affect
our potential revenue. Additionally, delays in any such payments, whether as
a
result of disputes or for any other reason, would also adversely affect our
potential revenue.
If
our
costs were to increase more rapidly than payment adjustments we receive from
Medicare, Medicaid or other third-party payors for any of our potential
products, our revenue could be negatively impacted. Accordingly, our revenue
may
be largely dependent on our ability to manage costs of providing such
products.
We
may depend on payments from third-party payors, including managed care
organizations. If these payments are reduced, eliminated or delayed, our
prospective revenues could be adversely affected.
We
may be
dependent upon private sources of payment for any of our potential products
or
research services. Any amounts that we may receive in payment for such products
or services may be adversely affected by market and cost factors as well as
other factors over which we have no control, including regulations and cost
containment and utilization decisions and reduced reimbursement schedules of
third-party payors. Any reductions in such payments, to the extent that we
could
not recoup them elsewhere, would have a material adverse effect on our
prospective business and results of operations. Additionally, delays in any
such
payments, whether as a result of disputes or for any other reason, would have
a
material adverse effect on our prospective business and results of
operations.
If
the FDA or other state or foreign agencies impose regulations that affect our
potential products, our costs will increase.
The
development, testing, production and marketing of any of our potential products
that we may manufacture, market or sell following a business combination
(including Dynogen’s products following consummation of the proposed Merger) may
be subject to regulation by the FDA as “drugs.” All “new drugs” must be the
subject of an FDA-approved new drug application (NDA) and all new biologics
products must be the subject of a biologics license application (BLA) before
they may be marketed in the United States. All generic equivalents to previously
approved drugs or new dosage forms of existing drugs must be the subject of
an
FDA-approved abbreviated new drug application (ANDA) before they may be marketed
in the United States. In all cases, the FDA has the authority to determine
what
testing procedures are appropriate for a particular product and, in some
instances, has not published or otherwise identified guidelines as to the
appropriate procedures. The required product testing and approval process for
new drugs and biologics ordinarily takes several years and requires the
expenditure of substantial resources. Testing of any product under development
may not result in a commercially viable product. Even after such time and
expenses, regulatory approval by the FDA may not be obtained for any products
developed. Even if regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections. Subsequent discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on the
product or manufacturer, including withdrawal of the product from the
market.
Even
if
required FDA approval has been obtained with respect to a new drug or biologic
product, foreign regulatory approval of a product must also be obtained prior
to
marketing the product internationally. Foreign approval procedures vary from
country to country and the time required for approval may delay or prevent
marketing. Although there is now a centralized European Union approval mechanism
for new pharmaceutical products in place, each European Union member state
may
nonetheless impose its own procedures and requirements, many of which are time
consuming and expensive, and some European Union member states require price
approval as part of the regulatory approval process. Thus, there can be
substantial delays in obtaining required approval from both the FDA and foreign
regulatory authorities.
The
regulatory requirements applicable to any new drug or biologic product may
be
modified in the future. We cannot determine what effect changes in regulations
or statutes or legal interpretations may have on a product in the future. Any
changes or new legislation could have a material adverse effect on our ability
to develop and sell new drug and biologics products and, therefore, our ability
to generate revenue and cash flow from them.
The
FDA and state authorities have broad enforcement powers. The FDA can impose
civil and criminal enforcement actions and other penalties on us if we were
to
fail to comply with stringent FDA regulations. Our failure to comply with
applicable regulatory requirements could result in enforcement action by the
FDA
or state agencies, which may include any of the following
sanctions:
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warning
letters, fines, injunctions, consent decrees and civil
penalties;
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repair,
replacement, refunds, recall or seizure of our
products;
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operating
restrictions or partial suspension or total shutdown of
production;
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refusal
of requests for approval of new products, new intended uses, or
modifications to existing products;
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withdrawal
of market approvals previously granted;
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If
any of
these events were to occur, it could harm our business.
Medical
manufacturing facilities must maintain records, which are available for FDA
inspectors documenting that the appropriate manufacturing procedures were
followed.
Should
we
acquire such a facility as a result of a business combination, the FDA would
have authority to conduct inspections of such a facility. Labeling and
promotional activities are also subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. Any failure by us to take
satisfactory corrective action in response to an adverse inspection or to comply
with applicable FDA regulations could result in enforcement action against
us,
including a public warning letter, a shutdown of manufacturing operations,
a
recall of our products, civil or criminal penalties or other sanctions. From
time to time, the FDA may modify such requirements, imposing additional or
different requirements that could require us to alter our business.
RISKS
RELATED TO THE POTENTIAL MERGER
The
combined company’s working capital could be reduced and, following the Merger,
our stockholders could own less than 40% of our outstanding common stock.
Pursuant
to our Second Amended and Restated Certificate of Incorporation, holders of
shares issued in our Public Offering may vote against the proposed Merger with
Dynogen and demand that we convert their shares into a pro rata share of the
amount held in the Trust Account (including the amount held in the trust account
representing the deferred portion of the underwriters’ fee), inclusive of any
interest earned on such pro rata share (net of taxes payable). We will not
complete the Merger if holders of 30% or more of the shares of common stock
issued in our Public Offering vote against the Merger and exercise these
conversion rights. To the extent the Merger is completed and holders of less
than 30% of the shares of our common stock issued in the Public Offering have
properly demanded to convert their shares, there will be a corresponding
reduction in the amount of funds available to the combined company following
the
Merger and a reduction in the aggregate percentage of our outstanding shares
that is owned after the Merger by our stockholders immediately prior to the
Merger. As of February 29, 2008, assuming the Merger proposal is approved,
the
maximum amount of funds that could be disbursed to our stockholders upon the
exercise of the conversion rights (excluding deductions for tax payments)
without implicating the ability to complete the Merger will be approximately
$20.4 million, or approximately 29.99% of the funds currently held in trust.
If
the maximum amount of funds were disbursed, the percentage of our outstanding
common stock that would be owned by our existing stockholders who did not
exercise their conversion right would be approximately 37.8%, based on the
relative numbers of shares outstanding of our common stock and Dynogen common
stock and other securities as of February 5, 2008.
Pursuant
to the terms of the Merger Agreement, a substantial number of shares will be
issued upon, and will be potentially issuable after, the consummation of the
Merger, which will result in significant dilution to our stockholders
immediately prior to the Merger.
As
of
February 5, 2008, 10,781,250 shares of our common stock were outstanding. Upon
the consummation of the Merger, we will issue approximately 13.5 million shares,
and reserve for issuance approximately 7.4 million additional shares of our
common stock for future issuance upon the satisfaction of certain milestones
and
the exercise of options and warrants assumed or issued in connection with the
Merger. Assuming that, prior to the consummation of the Merger, no additional
shares of our common stock are issued and none of our stockholders exercise
their conversion rights and that none of our or Dynogen’s outstanding options or
warrants are exercised, upon such consummation, our stockholders immediately
prior to the Merger are expected to own approximately 44.4% of the then
outstanding shares of our common stock (or approximately 43.7% on a
fully-diluted basis giving effect to all outstanding options, warrants and
other
rights, including the milestone payments); however, if 29.99% of our
stockholders exercise their conversion rights, we expect our stockholders to
hold approximately 37.8% of the shares of our common stock outstanding
immediately following the closing of the Merger (or approximately 40.5% on
a
fully-diluted basis giving effect to all outstanding options, warrants and
other
rights, including the milestone payments).
A
substantial number of our shares will become eligible for future resale in
the
public market after the Merger which could result in dilution and have an
adverse effect on the market price of those shares.
If
the
Merger is completed, warrants to purchase 8,625,000 shares of common stock
issued in connection with our Public Offering and warrants to purchase 1,800,000
shares of our common stock issued in a Private Placement to certain of our
founding stockholders immediately prior to our Public Offering will become
exercisable on the date the Merger is completed. Additionally, if the Merger
is
completed, it is currently estimated that approximately 20.9 million shares
of
our common stock will be issued, or reserved for future issuance, to the holders
of Dynogen capital stock, option, warrants or other securities at the closing
of
the Merger.
Substantially
all of these shares will be eligible for resale upon issuance, subject to
limitations under applicable securities laws. Additionally, if the Merger is
completed, we expect to register for resale the shares issued to those former
stockholders of Dynogen who will become our affiliates and would not otherwise
be able to sell without an exemption from registration. In addition, our Initial
Stockholders have the right to require us to file a registration statement
covering the resale of certain shares of our common stock, warrants and shares
of our common stock underlying such warrants held by such persons. Consequently,
at various times after completion of the Merger, a substantial number of
additional shares of our common stock will be eligible for resale in the public
market. Sales of substantial numbers of such shares in the public market could
adversely affect the market price of such shares and of the warrants.
Notwithstanding the foregoing, the shares of our common stock held by our
Initial Stockholders are subject to escrow agreements and will not be released
from escrow until the earliest of (a) with respect to certain shares of our
common stock, the first year anniversary of our initial business combination,
and with respect to certain warrants to purchase our common stock, the six
month
anniversary of our initial business combination, (b) our liquidation (in which
case they will have no value) and (c) the consummation of a liquidation, merger,
stock exchange or other similar transaction which results in all of our
stockholders having the right to exchange their shares of common stock for
cash,
securities or other property subsequent our initial business combination, if
any, with a target business. Additionally, because we are a blank check company,
so long as they continue to be affiliates, our Initial Stockholders will not
be
able to sell our securities pursuant to Rule 144.
Our
directors and executive officers have interests in the Merger that are different
from yours because if the Merger is not approved then the shares held by them
may become worthless.
In
considering the recommendation of our board of directors to vote for the
proposal to approve the Merger Agreement, you should be aware that a number
of
our officers and directors have interests in the Merger that are different
from,
or in addition to, your interests as a stockholder. These interests include,
among other things:
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If
the Merger is not approved and we are therefore required to dissolve
and
liquidate, the shares of common stock purchased prior to our Public
Offering and held by our officers and directors (or their affiliates)
will
be worthless because our directors and officers are not entitled
to
receive in respect of such shares any of the net proceeds of our
Public
Offering that may be distributed from our Trust Account upon our
liquidation. If the Merger is not approved and we are therefore required
to dissolve and liquidate, such officers and directors will, however,
be
entitled to receive their share of the net proceeds of our Public
Offering
that may be distributed from our Trust Account with respect to any
shares
of our common stock purchased in or following our Public Offering.
In
addition, the warrants held by such persons for which they paid an
aggregate of $1,800,000, which will be exercisable at the completion
of
the Merger for 1,800,000 shares of our common stock, will expire
without
value in the event that we are required to
liquidate.
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If
the Merger is not approved and we are therefore required to dissolve
and
liquidate, our Initial Stockholders have each agreed on a joint and
several basis to be personally liable to ensure that the proceeds
from our
Public Offering held in the trust account are not reduced by the
claims of
(a) vendors or other entities for services rendered or products sold
to us
or (b) any prospective target business, in each case only to the
extent
the payment of such debts and obligations actually reduces the amount
of
funds in the Trust Account (or, in the event that such claim arises
after
the distribution of the Trust Account, to the extent necessary to
ensure
that our Public Stockholders are not liable for any amount of such
loss,
liability, claim, damage or expense) and only with respect to vendors,
prospective target business and other entities we engage who do not
waive
their right or claim in or to the monies held in the Trust Account.
If the
Merger is completed, these indemnification obligations will
terminate.
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Certain
of our existing directors anticipate remaining on the board of directors
after the consummation of the Merger, which may result in the surviving
corporation paying a fee to them for their services.
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The
amount of stock held by executive officers, directors and other affiliates
following the Merger may limit your ability to influence the outcome of director
elections and other matters requiring stockholder approval.
Upon
consummation of the Merger with Dynogen, our officers, directors and affiliates
will beneficially own approximately 10% of our common stock. These stockholders
can have a substantial influence on all matters requiring approval by
stockholders, including the election of directors and the approval of mergers
or
other business combination transactions. This concentration of ownership could
have the effect of delaying or preventing a change in control or discouraging
a
potential acquirer from attempting to obtain control of the combined company,
which in turn could have a material adverse effect on the market price of our
common stock or prevent stockholders from realizing a premium over the market
price for their shares of common stock.
The
lack of diversification in our business following the Merger affects our ability
to mitigate the risks that we may face or to offset possible losses that we
may
incur as a result of competing in the biotechnology industry.
The
prospects for our success will be entirely dependent upon the future performance
of Dynogen’s business. We may not have the resources to diversify our operations
or benefit from the possible spreading of risks or offsetting of losses. By
consummating a business combination with only a single entity, our lack of
diversification may subject us to numerous economic, competitive and regulatory
developments, any or all of which may have a substantial adverse impact upon
the
biotechnology industry and result in our dependency upon the development or
market acceptance of Dynogen’s products.
The
combined company may form joint ventures that could harm its operating results,
dilute your ownership of the combined company, increase its debt or cause it
to
incur significant expense.
As
part
of the combined company’s business strategy, it may pursue strategic alliances
that leverage its core technology and industry experience to expand its product
offerings or distribution. To effect these strategic alliances, we may choose
to
issue shares of our common stock or securities convertible into our common
stock, which would dilute your interest in us. Alternatively, it may be
necessary for us to raise additional funds for working capital through public
or
private financings. Additional funds may not be available on terms that are
favorable to us, or at all, and to the extent such funds are available, such
financing may include restrictive covenants that could hinder our ability to
obtain additional financing, if necessary.
Following
the Merger with Dynogen, we will incur significant increased costs, and our
financial controls and procedures may not be sufficient to ensure timely and
reliable reporting of financial information, which, as a public company, could
materially harm our stock price and listing on the American Stock Exchange.
Following
the Merger, we will incur significant legal, accounting and other expenses.
Dynogen has not incurred these expenses as a private company, and, because
of
our lack of an operating business, to date, we have incurred these expenses
only
to a limited extent. In addition, the Sarbanes-Oxley Act of 2002, and rules
of
the SEC, and the American Stock Exchange have imposed various requirements
on
public companies including requiring establishment and maintenance of effective
disclosure and financial controls. Following the Merger, our management and
other personnel will need to devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations will increase
our
legal and financial compliance costs and will make some activities more
time-consuming and costly. For example, these rules and regulations may make
it
more difficult and more expensive for us to obtain and maintain director and
officer liability insurance, and we may be required to incur substantial costs
to maintain the same or similar coverage.
The
Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain
effective internal control over financial reporting and disclosure controls
and
procedures. In particular, we must perform system and process evaluation and
testing of our internal control over financial reporting to allow management
and
our independent registered public accounting firm to report on the effectiveness
of our internal control over financial reporting, as required by Section 404
of
the Sarbanes-Oxley Act, beginning with the annual report on Form 10-K for the
fiscal year ending December 31, 2008. Our compliance with Section 404 of the
Sarbanes-Oxley Act will require that we incur substantial accounting expense
and
expend significant management efforts.
The
effectiveness of our controls and procedures may in the future be limited by
a
variety of factors, including:
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faulty
human judgment and simple errors, omissions or
mistakes;
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fraudulent
action of an individual or collusion of two or more
people;
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inappropriate
management override of procedures;
and
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the
possibility that any enhancements to controls and procedures may
still not
be adequate to assure timely and accurate financial
information.
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If
we are not
able to comply with the requirements of Section 404 in a timely manner,
or if we
or our independent registered public accounting firm identify deficiencies
in
our internal control over financial reporting that are deemed to be material
weaknesses, we may be subject to delisting from any exchange on which our
securities are then traded, SEC investigation and civil or criminal sanctions.
Our
ability to successfully implement our business plan and comply with Section
404
requires us to be able to prepare timely and accurate financial statements.
We
expect that we will need to continue to improve existing, and implement new
operational and financial and accounting systems, procedures and controls to
manage our business effectively.
Any
delay
in the implementation of, or disruption in the transition to, new or enhanced
systems, procedures or controls may cause our operations to suffer, and we
may
be unable to conclude that our internal control over financial reporting is
effective and to obtain an unqualified report on internal controls from our
auditors as required under Section 404 of the Sarbanes-Oxley Act. 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 our first 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 under the Securities Exchange Act of 1934, as
amended, or the Exchange Act. A lack of investor confidence in the reliability
and accuracy of our public reporting could cause our stock price to decline.
Following
the Merger, our management will have broad discretion to use available cash
and
the investment of these resources may not yield a favorable return. We may
invest the available cash in ways you disagree with.
Our
management will have broad discretion as to how to spend and invest the cash
that will be available to us upon completion of the Merger and distribution
from
the trust fund, and we may spend or invest these capital resources in a way
with
which you may disagree. Because we are not required to allocate cash to any
specific investment or transaction, you cannot determine at this time the value
or propriety of our application of these resources. Accordingly, you will need
to rely on our post-Merger management’s judgment with respect to the use of this
cash. Moreover, you will not have the opportunity to evaluate the economic,
financial or other information on which we base our decision on how to use
this
cash. Pending use, we plan to invest available cash in short-term,
investment-grade, interest bearing securities. These investments may not yield
a
favorable return to stockholders.
Neither
we nor Dynogen has ever declared or paid dividends on its capital stock, and
we
do not anticipate paying dividends in the foreseeable future. As a result,
you
must rely on stock appreciation for any return on your investment.
Following
the Merger, Dynogen’s business will require significant funding, and we
currently plan to invest all available funds and future earnings in the
development and growth of this business. Therefore, we do not anticipate paying
any cash dividends on our common stock in the foreseeable future. Any payment
of
cash dividends will also depend on our financial condition, results of
operations, capital requirements and other factors and will be at the discretion
of our board of directors. As a result, capital appreciation, if any, of the
common stock will be your sole source of potential gain for the foreseeable
future. Furthermore, we may in the future become subject to contractual
restrictions on, or prohibitions against, the payment of dividends, including
pursuant to the terms of debt agreements.
Our
ability to utilize Dynogen’s historical, federal and state net operating loss
carryforwards may currently be limited or may become limited.
As
of
December 31, 2007, Dynogen had net operating loss carryforwards for federal
and
state income tax purposes of $63 million and $48 million, respectively. If
not
utilized, these carryforwards will expire at various dates starting in 2008
through 2027. Generally, utilization of a company’s net operating loss
carryforwards may be subject to substantial annual limitations due to rules
contained in the Internal Revenue Code (and similar state provisions) that
are
applicable if the company experiences an “ownership change.” Generally, a change
of more than 50% in the ownership of a company’s stock, by value, over a
three-year period constitutes an ownership change for United States federal
income tax purposes. Additionally, even if there were no ownership changes
previously, it is possible that the Merger, when considered together with past
transactions and potential future transactions, could trigger an ownership
change for this purpose. As a result, our ability to use Dynogen’s net operating
loss carryforwards may be or become subject to substantial limitations, which
could potentially result in increased future tax liability and in the expiration
of Dynogen’s net operating loss carryforwards before they can be used.