UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
________________________
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Fiscal Year ended
July 31, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _______ to _______
Commission file number 0-20772
CYPROS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
California
(State or otherjurisdiction of incorporation or organization)
2714 Loker Avenue West, Carlsbad, California 92008
(Address of principal executive offices)
33-0476164
(I.R.S. Employer Identification No.)
Registrant's telephone number, including area code:
619) 929-9500
Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the
Act: Common Stock, no par value
(Title of class)
Redeemable Class "B" Warrant
(Title of class)
Indicate by mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 of 15(d) of the
Securities Exchange Act 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
As of October 21,1996, the Registrant had 11,613,748 shares of
Common Stock, no par value, outstanding, and the aggregate
market value of the shares held by non-affiliates on that date
was $34,706,916 based upon the last sales price of the
Registrant's Common Stock reported on the National Association
of Securities Dealers, Inc. Automated Quotation National
Market System.*
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the
Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
_______________
* Excludes 2,937,019 shares of Common Stock held by directors,
executive officers and shareholders whose beneficial ownership
exceeds ten percent of the shares outstanding on October
21,1996. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of the
management or policies of the Registrant, or that such person
is controlled by or under common control with the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997
Annual Meeting of Shareholders to be filed on or before
November 28, 1996 are incorporated by reference into Part III.
PART 1.
Item 1. Business.
Except for the historical information contained herein, the
following discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results
could differ materially from those discussed here. Factors
that could cause or contribute to such differences include,
but are not limited to, those discussed in the description of
the Company's business below and the sections entitled
"Licenses", "Manufacturing", "Sales and Marketing",
"Competition", "Government Regulation", "Patents and
Proprietary Rights" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations", those
discussed in the S-3 Registration Statement File No. 333-3507
filed with U.S. Securities and Exchange Commission, as well as
those discussed in any documents incorporated by reference
herein or therein.
General
The Company is developing and marketing acute care drugs for
the hospital market. On August 9, 1995, it acquired its first
marketable products, Glofil and Inulin, two injectable drugs
that assess kidney function by the measurement of glomerular
filtration rate ("GFR"). It is also currently conducting six
(6) Phase II clinical trials on CPC-111 and CPC-211, two drugs
potentially indicated for a number of major disorders caused
by impaired blood flow, known as "ischemia". These disorders
include heart attack and ischemic heart disease, surgically
induced ischemia, sickle cell anemia crises, stroke and closed
head injury and the drugs are covered by U.S. patents. During
the year, the Company made two interim releases of
statistically significant data from 55 patients in its Phase
II clinical trial of CPC-111 in coronary artery bypass
grafting surgery patients which showed that CPC-111 is acting
as a cardioprotective drug. (See Clinical Programs on page 8).
Kidney Disease and the Company's Acquired Products. Kidney
disease afflicts more than 2,000,000 Americans and results in
over $12 billion annually in healthcare costs in the United
States. The Company believes that kidney disease can be
reduced if identified at an early stage by the monitoring of
renal function. Glofil and Inulin are products cleared by the
U.S. Food and Drug Administration ("FDA") for monitoring renal
function by determining GFR. Glofil is more accurate than its
principal competitor, creatinine clearance, in the measurement
of GFR for
the estimated 500,000 patients with severe kidney disease and
the Company is targeting this segment of the market.
Nephrologists and nuclear medicine departments at major
medical centers are the primary end users of these products.
During the fiscal year ended July 31, 1996, the Company
established a field sales force and customer service function,
obtained the appropriate licenses for its own distribution
facility in Carlsbad, California and Glofil and Inulin reached
sales of $1,275,000 after the Company acquired them.
Ischemia-Induced Cell Damage and the Company's Phase II
Clinical Programs. Similarly, there are approximately
4,000,000 cases of ischemia-induced disorders annually in the
United States, resulting in over 900,000 deaths and an
estimated $200 billion in annual costs for physical and mental
rehabilitation and ongoing care, and yet there are currently
no FDA-approved drugs to avoid or reverse the massive cell
damage caused by ischemia (termed "cytoprotective drugs").
Currently approved drugs for treating cardiovascular ischemia,
such as "clot busting" drugs, serve to re-establish blood flow
but do not have direct cytoprotective benefits. The Company
believes that the drugs it is developing, if cleared by the
FDA and successfully marketed, should reduce significantly the
number of fatalities and the rehabilitation and ongoing care
costs associated with ischemic disorders.
Impairment of blood flow reduces the supply of oxygen to body
cells, interrupting normal aerobic metabolism and causing
depletion of adenosine triphosphate ("ATP"), the cells'
primary energy source. Ischemia-induced depletion of ATP
produces a myriad of increasingly destructive cellular events
known as the "toxic ischemic cascade". The Company believes
that all cytoprotective drugs under development by others for
treatment of ischemia are focused on treating specific
elements of the toxic ischemic cascade, leaving other elements
free to cause cell, tissue and organ damage.
The Company's approach, based on preventing or reversing the
toxic ischemic cascade, is comprehensive in nature and, the
Company believes, potentially more effective. CPC-111 and CPC-
211 are designed to act during and after ischemia by
maintaining cellular ATP levels or accelerating their
restoration. CPC-111 (a natural substance) and CPC-211 have
very low orders of toxicity, making them more amenable to
being used early in the patient management process, which is
critical in acute care settings.
Further, CPC-111 and CPC-211 are small molecules, easily
deliverable and inexpensive to produce. Extensive pre-clinical
data shows desirable therapeutic effects in animal models of
the targeted diseases. Significant human data, available from
the Company's own studies and independent, physician-sponsored
Investigational New Drug applications ("INDs"), show that each
of these drugs is well tolerated when administered at
clinically relevant doses to healthy subjects. The minimal
side effects associated with CPC-111 and CPC-211 will greatly
reduce their development risk and may permit their broad,
early use in acute care settings, such as ambulances and
emergency rooms, where rapid access to treatment is of utmost
importance.
During the fiscal year ended July 31, 1996, the Company began
a Phase II trial of CPC-211 in closed head injury patients and
continued a Phase II trial on CPC-211 in stroke patients.
During the year, the Company also began a dose-ranging Phase
II clinical trial on CPC-111 in sickle cell anemia crises
patients
and one in angioplasty patients and continued Phase II trials
on CPC-111 in congestive heart failure patients and in cardiac
bypass grafting surgery patients. The Company's strategy is
to
reduce the risk associated with drug development by selecting
for large-scale pivotal trials the clinical indication(s)
showing the best Phase II results from the multiple small-scale
Phase II trials on CPC-111 and CPC-211 that the Company has
underway. The Company intends to begin Phase III trials of CPC-
111 and CPC-211 during the fiscal year ending July 31, 1997.
Pre-clinical Programs. Further implementing its overall strategy
of developing drugs that protect cells from ischemic damage, the
Company is conducting pre-clinical studies on a number of
additional drugs meant to reduce the neurodegeneration
associated with stroke and traumatic head injury. The Company
believes that these drugs will reduce "excitotoxicity", the
excess release of excitatory amino acid ("EAA")
neurotransmitters in the brain that stems from ischemically-
caused ATP depletion in certain brain cells. Drugs being
developed in these studies include: (i) a new class of neuronal
calcium channel blockers which block excessive EAA
neurotransmitter release; and (ii) a patented series of novel
compounds which augment levels of adenosine (a naturally
occurring substance which inhibits EAA release) in ischemic
tissue by inhibiting its metabolism. During the year, the
Company also received a $100,000 Small Business Innovation
Research Phase I grant to develop a prodrug for CPC-111. This
program was recently initiated with the goal of producing CPC-
111 prodrugs with improved pharmacokinetic properties.
Acquired Products for the Hospital Market
The Company's strategy includes building near-term
sustainability with the cash flow from acquired acute care
products for the hospital market with the goal of reducing its
overall cash consumption rate and building its sales, marketing
and distribution infrastructure in advance of FDA clearance of
CPC111 and CPC-211.
Glofil and Inulin
Kidney disease afflicts more than 2,000,000 persons in the
United States and is increasing primarily due to the growth in
diabetes and lupus cases. Kidney disease results in over $12
billion annually in healthcare costs in the United States. The
Company believes that more accurate diagnosis and monitoring of
renal disease will aid in the management of the primary causes
of end stage renal disease.
Glofil-125 and Inulin, two injectable products acquired by the
Company on August 9, 1995, are FDA-cleared products for the
measurement of renal function. Nephrologists and nuclear
medicine departments at major medical centers are the primary
users of these products. During the fiscal year ended July 31,
1996, the Company recorded sales of $1,275,000 from the sale of
Glofil-125 and Inulin. Two customers using Glofil-125 for long-
term research studies accounted for 39% and 15%, respectively,
of net sales of these products.
Glofil-125 is an injectable radioactive diagnostic drug, which
provides rapid information on GFRs with great accuracy. This is
an established product that is covered by an FDA-cleared New
Drug Application, and is currently sold by the Company in 4ml
vials and in prefilled syringes through the 117 nationwide
radiopharmacies of Syncor International pursuant to a
distribution agreement entered into with the Company in February
1996. Inulin is an injectable diagnostic drug, which provides a
measure of GFRs. Inulin is currently sold in 50 ml ampules with
actual patient dosing correlated to patient weight.
The Company believes there is substantial opportunity for
increased utilization of Glofil-125. Present diagnostic
procedures for measuring kidney function include serum
creatinine and creatinine clearance tests. These two tests are
the most commonly performed methods of measuring kidney function
because they are cheaper tests, however both methods
significantly overestimate kidney function in the estimated
500,000 patients severe renal disease. The use of Glofil-125 is
a more direct, true measure of kidney function yielding accurate
results. This improved accuracy can be essential to reliably
monitoring disease progression and intervention, as well as
assessing the immediate state of renal impairment. The biggest
impediment to the continued growth in the sales of Glofil-125
would be a change in the ability of the end users to obtain
reimbursement for the test or the unforeseen termination of the
research studies being conducted by the Company's two largest
customers.
Inulin, which is sold by the Company, and 99m Tc-DTPA (which is
not sold by the Company) are alternative agents for GFR
measurement, however the preparation and use of these two drugs
is difficult and they do not provide the practical advantages of
Glofil-125. There are no new diagnostic drugs being introduced
or in development that the Company is aware of as a competitive
threat to Glofil-125.
Cytoprotection Market Opportunities
Cytoprotective drugs for acute care settings that treat ischemic
injury are not currently available and the market opportunities
for the Company's drugs are large, totalling approximately
4,000,000 cases annually in the United States. The Company
believes that its drugs, if approved, could substantially reduce
not only the 900,000 fatalities associated with ischemia-related
disorders but also reduce significantly the more than $200
billion annual cost of rehabilitation and ongoing care in the
United States.
The Company's drugs are designed to be administered
intravenously in order to speed their delivery to the ischemic
tissue. In order to ensure early interventions, they are
intended to be standard components of "crash boxes" in
ambulances, hospital emergency rooms, operating theater suites,
endoscopy suites and radiology suites. Their lack of substantial
toxicity should suit them for this purpose.
Circulatory System Ischemia
According to the American Heart Association and the National
Institutes of Health, heart attack and stroke represent the
number one (500,000 cases annually) and number three (150,000
cases annually) leading causes of death in the United States,
respectively. Heart attack and stroke are the result of ischemia
to the heart and brain, respectively.
Cardiovascular ischemia can result in a spectrum of clinically
significant events ranging from angina (pain) to heart attack
and sudden death. In addition to the numerous trauma or disease
related causes of ischemia, there are a variety of voluntary
surgical procedures which result in ischemia to vital organ
systems. Procedures such as coronary artery bypass grafting
surgery and coronary angioplasty, both of which are performed to
improve blood flow to the heart, in themselves induce temporary
ischemia which can result in tissue damage. Thus, CPC-111, if
approved, could also be a part of the treatment regimen for
these disorders. All of these conditions or procedures represent
potential opportunities for use of the Company's drugs to reduce
the tissue damage known to be associated with them.
Cerebrovascular ischemia (stroke) can result in temporary loss
of consciousness, permanent behavioral and neurologic
impairment, coma and death. Traumatic injury to the head is
caused by accidents, near drownings and similar incidents. The
resultant medical problems are, in large part, caused by
ischemia to the brain. The biochemical processes associated
with stroke and head trauma are thought to be very similar;
thus, drugs developed for one indication are expected to be
useful for the other.
Sickle Cell Anemia
Sickle cell anemia is an autosomal recessive genetic disease
carried by about 8% of African-Americans. Approximately 60,000
African-Americans suffer from the most severe form (homozygous)
of the disease, termed sickle cell "crisis", where the red blood
cells form "sickle" shapes that can clog up capillaries and
result in severe and disseminated ischemia, and undergo multiple
crises each year. CPC-111 has been shown pre-clinically to
prevent this "sickling" process and the Company is evaluating
it in a Phase II trial of sickle cell anemia crisis patients.
The Pathology of Ischemia
Metabolic Aspects (General, All Tissues)
All living animal cells require glucose and oxygen to survive,
both of which are supplied to tissues by the blood. Glucose is
transformed into carbon dioxide and water with the resultant
formation of ATP. ATP is the universal fuel which is required
to keep the cell alive. During and after ischemia, the decrease
in cellular ATP levels damages the cell and, the Company
believes, results in the toxic ischemic cascade, a myriad of
celldamaging processes discussed below which cause further cell
damage.
ATP generation occurs in two phases. The first phase, called
glycolysis or anaerobic metabolism does not require oxygen. The
second phase called aerobic metabolism requires oxygen and
occurs in mitochondria. Glycolysis is a means of producing
cellular energy in ischemic conditions, and therefore,
represents the body's natural defense against ischemic damage.
For this reason, the facilitation of glycolysis is of interest
therapeutically in the prevention of ischemic damage to tissues
and organs. When pyruvic acid builds up during ischemia due to
the inability of aerobic metabolism to utilize it, an enzyme
converts it to lactic acid which blocks glycolysis. The
therapeutic principle underlying CPC-111 and CPC-211 is to
facilitate glycolysis during and after ischemia so the cell
continues to produce ATP and the toxic ischemic cascade is pre-
empted or reversed. Specifically, CPC-111 bypasses the lactic
acid block and does not need to be energized by ATP to be
metabolized. CPC-211 reduces ischemia induced lactic acid
accumulation and therefore allows energy metabolism to continue.
Excitotoxicity (Nerve Tissue)
The destructive impact of ATP depletion in nerve tissue is
further complicated by the over-production in nerve cells of
various excitatory amino acids, chemicals that transmit nerve
impulses from one nerve cell to another. The over-production
and release of EAAs (predominately glutamate and aspartate) by
nerve cells exposed to ischemia over-stimulates adjacent
postsynaptic nerve cells, causing them in time to succumb to
metabolic exhaustion and cell death. This ischemia-induced
process, called
delayed excitotoxicity, is associated with a number of acute
(stroke and traumatic head injury) and chronic (Alzheimer's,
Parkinson's Disease and Amyotrophic Lateral Sclerosis)
neurologic disorders. Controlling delayed excitotoxicity by
blocking the postsynaptic EAA receptors has recently attracted
the attention of both academic and pharmaceutical scientists.
The drugs in development that act by this mechansim to date have
considerable side effects and only block selected receptor
subtypes, therefore, only dealing with part of the problem since
all receptor subtypes appear to cause damage.
Recent evidence has shown that specific presynaptic channels,
neuronal calcium channels, regulate the release of
neurotransmitters in nerve cells. The Company has shown that
compounds which block excessive EAA neurotransmitter release
from nerve cells greatly reduce excitotoxicity and post-ischemic
tissue damage in animal models of stroke and head trauma. The
Company is seeking to develop drugs that specifically block
neuronal calcium channels and therefore, if successful, would
block the excitotoxic process and reduce the resultant cell
damage. These drugs are expected to have a more comprehensive
effect on excitotoxicity than the specific postsynaptic EAA
receptor blockers, since they will reduce the stimulation of all
and not just some EAA receptors. See " Neuronal Calcium Channel
Blocker Program."
The Company has also shown that adenosine, a natural compound,
has cytoprotective properties. The Company is seeking to develop
a series of drugs, called adenosine metabolism inhibitors,
which, if successful, would augment adenosine levels in ischemic
tissue and have cytoprotective effects in both brain and heart
tissue. See "Adenosine Metabolism Inhibitor Program."
The Toxic Ischemic Cascade
Ischemia-induced cell damage triggers a number of processes
which cause further damage to each affected cell and its
surrounding cells. This myriad of destructive processes is
facilitated by reperfusion injury, which occurs after blood flow
is reestablished. The traumatized, ATP-depleted cell enters into
the toxic ischemic cascade, resulting in the release of a host
of toxic agents, including damaging reactive chemicals called
free radicals, as well as other molecules that are products of
cell membrane breakdown, all of which damage cells. Excessive
intracellular calcium buildup is also an element of the toxic
ischemic cascade and also triggers a host of other damaging
processes such as activation of proteolytic enzymes (enzymes
that break down proteins) which digest cells and activation of
protein kinases which regulate cell metabolism. The traumatized
cell also releases agents which stimulate the immune system,
activating various blood cells, such as neutrophils and
macrophages which actually eliminate the cell affected by
ischemia. Rather than target each of these myriad events, the
Company's drugs, CPC-111 and CPC-211, address the issue of ATP
replenishment so that the cell can correct the ischemic cascade
naturally.
There are currently no known FDA-approved cytoprotective drugs.
Those under development are, to the Company's knowledge,
primarily aimed at specific elements of the toxic ischemic
cascade. The Company believes that its approach to
cytoprotective drug development is unique in that it seeks to
preempt or reverse the entire cascade by decreasing the initial
metabolic trauma which triggers it (i.e., ATP depletion). The
Company believes that this approach is preferable to treating
specific elements of the cascade, since it more comprehensively
addresses the underlying pathology and should therefore result
in more efficacious therapy.
Ischemia Drugs in Development - The Metabolism Program
The Company is conducting four Phase II clinical trials on CPC
111 and two Phase II trials on CPC-211. These drugs are designed
to minimize the tissue damage associated with cardiovascular
ischemia (e.g., congestive heart failure and angioplasty),
surgically-induced ischemia, sickle cell anemia crises, and
acute cerebral ischemia (specifically, stroke and traumatic head
injury). The Company expects to finish these trials during the
fiscal year ending July 31, 1997 and also to begin Phase III
trials with CPC-111 and CPC-211 in at least one indication each.
CPC-111. CPC-111 is a small non-peptide molecule that the
Company believes (based on extensive pre-clinical and
mechanistic data) stimulates and maintains glycolysis in cells
undergoing ischemia by circumventing the ischemia-induced
blockage of this process. The Company has licensed four issued
U.S. patents which cover the use of CPC-111 for acute ischemic
heart disease (such as acute myocardial infarction ("AMI"),
congestive heart failure and unstable angina), surgically-
induced ischemia (e.g., CABG surgery), and other ischemic
disorders and has several patents pending in the United States
and Europe. Pre-clinical studies conducted by various
investigators involving this compound in cardiovascular ischemia
(including myocardial infarction), sickle cell anemia, septic
and hemorrhagic shock and generalized trauma have shown
therapeutic benefits as indicated by significant tissue
preservation, improved organ function and survival in animal
models.
There are published U.S. and foreign clinical studies with CPC
111 indicating that is is well tolerated in humans with little
or no side effects. More than 500 patients have been tested with
the drug worldwide. These studies indicate that the drug
improves heart function in congestive heart failure patients as
well as in other situations where the heart is injured.
In December 1995 and in August 1996, the Company released data
from its Phase II trial with CPC-111 in coronary artery bypass
grafting surgery patients. Stage 1 data comprised 10 active-
and 10 placebo-treated patients with the former receiving 250
mg/kg
of CPC-111 prior to the surgery. Stage 3 data comprised 15
activeand 15 placebo-treated patients with the former receiving
250 mg/kg of CPC-111 prior to surgery and the cardioplegia
solution was supplemented with 2.5 mM of the drug.
The Company monitored the patients at multiple time points
during and after surgery to evaluate various hemodynamic and
blood chemistry measures and post-operative inotropic and
vasodilator therapy. Concerning the hemodynamic measures, the
active-treated group in both stages showed higher cardiac output
and cardiac index scores which were statistically significant at
12 hours and at the 0-12 hour area under the curve. Concerning
the blood chemistry measure, creatinine kinase MB ("CKMB")
isoenzyme tended to be lower in the treated group and reached
statistical significance at 2-6 hours. CKMB is an isoenzyme that
is released through the cell wall into the blood stream with the
breakdown of the cellular wall by ischemia. Also, the active
treated group required approximately 50% less inotrope support
on the intensive care unit ("ICU") post-operatively and required
less vasodilator therapy allowing for earlier patient discharges
from the ICU.
The Company is continuing this study, comprising another 10
active- and 10 placebo-treated patients with the former
receiving
125 mg/kg of CPC-111 pre-bypass, which is necessary to
determine the dose-response curve. Also, the Company will
determine whether response is improved by adding two post-
bypass doses to the prebypass dose of the drug in an
additional 15 active- and 15 placebo-treated patients.
Consistent with the Company's strategy to diversify drug
development risk, during the fiscal year ended July 31, 1996,
the Company began a dose-ranging Phase II clinical trial with
CPC-111 in sickle cell anemia crises patients and in
angioplasty patients and continued Phase II trials in ischemic
congestive heart failure patients and coronary artery bypass
grafting surgery patients.
CPC-211. CPC-211 is also a small non-peptide molecule which
acts on glycolysis at a different site from CPC-111. The
Company has exclusive rights to an issued U.S. patent covering
the use of CPC-211 in cerebral ischemia and in 1996 was issued
a Notice of Allowance on a novel dosing regimen of CPC-211
based on data from the Company's Phase I trial. The Company
believes that CPC-211 stimulates a specific enzyme which is
present in the membrane of mitochondria that removes a
precursor of lactic acid (pyruvic acid) from the cytoplasm of
the cell by transporting it into the mitochondria, resulting in
a reduction of cell acidity. Increased post-ischemia
accumulation of lactic acid is a major causal factor in the
cessation of glycolysis, the resultant decrease in cellular ATP
levels and eventual cell death. Numerous studies have shown
that CPC-211 reduces post-ischemia lactic acid levels in animal
models, as well as in humans, subjected to various traumatic
events which would otherwise have resulted in increased lactic
acid (lactic acidosis). Pre-clinical animal studies involving
central nervous system trauma (ischemia to both the brain and
spinal cord) have documented the effectiveness of CPC-211 in
normalizing cell function and preventing or reducing tissue
damage.
CPC-211 has been employed by clinical investigators in patients
on an experimental basis for the intravenous treatment of
lactic acidosis. Published clinical studies have established
that CPC-211 reduces serum lactic acid and exhibits no serious
side effects. It has also been shown in human studies to
permeate the blood-brain barrier and to reduce brain lactic
acid levels in congenital lactic acidosis patients. The Company
believes that the availability of human data on CPC-211 should
facilitate and reduce the risk associated with its clinical
development.
Further, the Company's Phase I study in CPC-211 demonstrated
that the drug promptly lowers serum lactate, and that this
effec lsted for several hours. Using these data, this year the
Company began a Phase II clinical trial on CPC-211 in closed
head injury patients exploring similar properties of the drug
in the human brain. In addition, a Phase II clinical trial on
CPC-211 in stroke patients is continuing.
Ischemia Drugs in Pre-clinical Research-The Metabolism and
Excitotoxicity Programs
The Company is also seeking to develop new drugs for the
treatment of ischemia-related disorders involving neurological
damage, such as stroke, traumatic head injury, epilepsy and
chronic neurodegenerative disorders such as Alzheimer's and
Parkinson's disease. These pre-clinical research programs are
focused on either the metabolic or the excitotoxicity aspects
of ischemia therapeutics, and involve the chemical modification
of identified lead molecules that regulate adenosine metabolism
and various calcium ion channels on neuronal cells.
Adenosine Metabolism Inhibitor Program. The Company is seeking
to develop CPC-405 and certain of its derivatives, which are
novel small molecules with demonstrated potency as inhibitors
of adenosine metabolism. Adenosine is a natural cytoprotective
agent which is generated in ischemic tissue and serves to
protect cells from a variety of traumatic situations. Naturally
generated adenosine is rapidly degraded by enzymes. The Company
expects that CPC-405 will increase the level of adenosine in
tissue traumatized by ischemia and thereby increase its
cytoprotective effect. A U.S. patent has been issued on the
composition of the CPC-400 series of drugs. The Company will
seek to identify other lead compounds to take forward into
clinical development.
Neuronal Calcium Channel Blocker Program. The Company believes
that the therapeutic approach to excitotoxicity currently
attracting the most commercial attention involves the
development of specific EAA receptor blockers which inhibit the
excessive postsynaptic EAA action that is triggered by
ischemia. Although these EAA receptor blockers have
neuroprotective properties in cell culture and animal models of
ischemia, their usefulness is hampered by toxic side effects
associated with the blockage of EAA receptors and by the fact
that there are multiple EAA receptor subtypes, all of which
appear to cause post-ischemic damage when they are excessively
stimulated.
The Company is seeking to develop new classes of drugs that are
designed to remedy excitotoxicity in a potentially more
complete and effective manner by reducing EAA release from
nerve cells, thereby reducing the over-stimulation of all EAA
receptor subtypes. This pre-synaptic approach to
neuroprotection is viewed by the Company as potentially more
effective than blocking receptors post-synaptically.
Specifically, the Company is seeking to develop separate
classes of small-molecule drugs that act as neuronal calcium
channel blockers ("NCCB"), which it has labelled as the CPC-
300, CPC-800 and CPC-8000 series; the Company has synthesized
over 100 compounds in this series. If successful, these drugs
would have the ability to normalize or decrease EAA release and
thereby comprehensively reduce the over-stimulation of EAA
receptors. Prototype agents such as CPC-8027 have shown the
desired effect of acting at the neuronal calcium channels,
which controls EAA release. The Company has demonstrated
neuroprotection in several pre-clinical models with CPC-304,
CPC-317, CPC-877 and CPC-8027 and intends to further modify
them structurally with the goal of improved drug delivery to
the central nervous system. These modifications will require
additional pre-clinical testing.
The Company has devised a novel human cell assay which enables
it to determine whether various NCCBs have the desired
functional attributes. The assay involves using human cells
which have the functional neuronal-type calcium channel within
their membrane. Studies conducted by the Company indicate that
the neuronal-type calcium channel on these cells is
pharmacologically similar to that present on nerve cells, and
the Company believes that possession of this assay technology
confers a competitive advantage in the development of neuronal
calcium antagonists. The channel is also coupled to a function
that can be measured using conventional laboratory techniques.
The Company has filed two U.S. patent applications covering
certain compounds with activity at the neuronal calcium channel
as well as the functional neuronal-type calcium channel assay
in human cells.
Licenses
The Company believes its strategic objectives can best be met
by combining its in-house research and development efforts with
licenses and research collaborations with scientists at outside
academic and clinical research centers.
The principal sources of the Company's existing licenses are:
Angel K. Markov, M.D.
CPC-111. The Company has obtained an exclusive license from
Dr. Markov to four U.S. patents covering the use of CPC-111 in
a number of indications including acute ischemic heart disease
(such as AMI, congestive heart failure and unstable angina),
surgically-induced ischemia, sickle cell anemia, ARDS, sepsis
and other ischemic disorders. The Company is funding clinical
development in Dr. Markov's laboratories at the University of
Mississippi Medical Center (and is currently funding a Phase II
clinical trial there in ARDS patients under his IND). In this
regard, the Company has undertaken certain development
obligations which must be met in order to maintain this license
in force. In the event the Company breaches the license
agreement, such as by not meeting certain milestones within the
specified time periods or by failing to expend certain amounts
in connection with clinical trials within specified time
periods, the license will automatically terminate and all
rights under the license and information acquired by the
Company concerning any products based on the licensed
technology will revert to Dr. Markov. In the event of such
termination, the Company will retain the rights to market
products for which sales occurred within the calendar year
prior to the termination, and all other products and
information related thereto based on the licensed technology
will revert to Dr. Markov. To date, the Company has met all
milestones.
University of Cincinnati
CPC-211. The Company has an exclusive license from University
of Cincinnati ("UC") to a U.S. patent covering the use of CPC-
211 in cerebral ischemia. The Company has undertaken certain
development obligations which must be met in order to maintain
its rights in force. If certain milestones are not met by the
Company within specified time periods, UC may, in its sole
discretion, elect to continue the agreement, negotiate in good
faith with the Company to modify the agreement or terminate the
agreement upon 30 days' written notice in which event all
rights under the license would revert to UEM. To date, the
Company has met all milestones.
Elie Abushanab, Ph. D.
Adenosine Metabolism Inhibitor. The Company obtained a license
to certain adenosine metabolism inhibiting compounds developed
by Dr. Elie Abushanab, which the Company believes will enhance
the levels of adenosine in cardiovascular ischemia situations.
Composition of matter claims on a patent application covering
certain of these compounds have been recently allowed. Under
the license, the Company must pay Dr. Abushanab certain
milestone payments relating to the development of any drug
covered by the license. To date, the Company has met all
milestones.
Manufacturing
The Company does not currently intend to undertake the
manufacture of any drugs which may derive from its
technologies. Glofil is manufactured for the Company by the
former owner of the drug and Inulin is manufactured for the
Company by one of its
existing contract manufacturers. In the case of CPC-111 and CPC
211, there are alternative sources of supply for the bulk drug
in existence, and the Company has entered into arrangements
with third parties to manufacture and formulate CPC-111 and CPC-
211 for clinical trials. There can be no assurance that any of
the Company's contract manufacturers will continue to meet the
Company's requirements for quality, quantity and timeliness or
the FDA's current Good Manufacturing Practice ("cGMP")
requirements or that the Company would be able to find a
substitute manufacturer for Glofil, Inulin, CPC-111, CPC-211 or
any other of its drugs which would meet these requirements or
that lots will not have to be recalled with the attendant
financial consequences to the Company. The Company's
dependence upon others for the manufacture of its drugs may
adversely affect the future profit margin, if any, on the sale
of those drugs and the Company's ability to develop and deliver
products on a timely and competitive basis. In the event the
Company is unable to obtain or retain contract manufacturers or
to obtain manufacturing on commercially acceptable terms, it
may not be able to commercialize its drugs as planned.
Sales and Marketing
The commercialization of drug products is an expensive and time
consuming enterprise. The Company currently has a customer
service representative and three field sales representatives
for Glofil and Inulin and is hiring additional sales
representatives. The Company believes that it will be able to
serve the hospital market in North America with a 50 to 70
person sales and marketing staff. There can be no assurance
that the Company will be able to establish sales and
distribution capabilities or be successful in gaining market
acceptance for its drugs.
Competition
The pharmaceutical industry in general is highly competitive.
Competition in the areas of the Company's activities is
substantial and expected to increase. The Company faces
competition from specialized biotechnology companies, large
pharmaceutical companies, academic institutions, government
agencies and public and private research organizations, many of
which have extensive resources and experience in research and
development, clinical testing, manufacturing, regulatory
affairs, distribution and marketing. Some of these entities
have significant research activities in areas upon which the
Company's programs focus. Many of the Company's competitors
possess substantially greater research and development,
financial, technical, marketing and human resources than the
Company and may be in a better position to develop, manufacture
and market drugs. These entities may discover and develop drugs
competitive with or superior to those developed by the Company.
Government Regulation
The manufacture and sale of drugs are subject to extensive and
arduous regulation by United States and foreign governmental
authorities prior to commercialization. In particular, drugs
are subject to rigorous preclinical and clinical testing and
other approval requirements by the FDA and comparable foreign
regulatory authorities. The process for obtaining the required
regulatory approvals from the FDA and other regulatory
authorities takes many years and is very expensive. There can
be no assurance that any drug developed by the Company will
prove to meet all of the applicable standards to receive
marketing approval in the United States or abroad. There can
be no assurance that any such approvals will be granted on a
timely
basis, if at all. Delays and costs in obtaining these
approvals and the subsequent compliance with applicable federal
and state statutes and regulations could materially adversely
affect the Company's ability to commercialize its drugs and its
ability to receive sales revenues.
The research activities required by the FDA before a drug can
be approved for marketing begin with extensive preclinical
animal and laboratory testing. The tests include laboratory
evaluation of product chemistry and animal studies for the
safety and efficacy of the drug. The results of these studies
are submitted to the FDA as part of an IND which is reviewed by
the FDA prior to beginning clinical trials, first in normal
volunteers and then in patients with the disease.
Clinical trials involve the administration of the
investigational new drug to healthy volunteers or to patients,
under the supervision of a qualified physician-principal
investigator. Clinical trials are conducted in accordance with
government-established statutes, regulations and guidelines and
under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy
criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Further, each clinical study must
be evaluated by an independent Institutional Review Board
("IRB") at the institution at which the study will be
conducted. The IRB considers, among other things, ethical
factors, the safety of human subjects and the possible
liability of the institution, and approves the informed consent
to be obtained from all subjects and patients in the clinical
trials. The Company will have to monitor the conduct of
clinical investigators in performing clinical trials and their
compliance with FDA requirements.
Clinical trials are typically conducted in three sequential
phases (Phase I, Phase II and Phase III), but the phases may
overlap. There can be no assurance that Phase I, Phase II or
Phase III testing will be completed successfully within any
specified time period, if at all, with respect to any of the
Company's drugs. Furthermore, the Company or the FDA may
suspend clinical trials at any time if it is felt that the
subjects or patients are being exposed to an unacceptable
health risk or that the investigational product lacks any
demonstrable efficacy.
The results of the pharmaceutical development, preclinical
studies and clinical studies are submitted to the FDA in the
form of a New Drug Application ("NDA") for approval of the
marketing and commercial shipment of the drug. The testing and
approval process is likely to require substantial time
(frequently five to eight years or more) and expense and there
can be no assurance that any approval will be granted on a
timely basis, if at all. The FDA may deny an NDA if applicable
regulatory criteria are not satisfied, require additional
testing or information, or require post-marketing testing and
surveillance to monitor the safety of the Company's drugs.
Notwithstanding the submission of the NDA and any additional
testing data or information, the FDA may ultimately decide that
the application does not satisfy its regulatory criteria for
approval. Finally, drug approvals may be withdrawn if
compliance with labeling and cGMP regulatory standards is not
maintained or if unexpected safety problems occur following
initial marketing.
Among the conditions for clinical studies and NDA approval is
the requirement that the prospective manufacturer's quality
control and manufacturing procedures conform to CGMP, which
must be followed at all times. In complying with standards set
forth in these regulations, manufacturers must continue to
expend time,
monies and effort in the area of production and quality control
to ensure full technical compliance.
The U.S. Congress has recently enacted the Prescription Drug
Act of 1992 requiring companies engaged in pharmaceutical
development, such as the Company, to pay user fees in the
amount of at least $100,000 upon submission of an NDA. In
addition to regulations enforced by the FDA, the Company also
is subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery
Act and other present and potential future federal, state or
local regulations. For marketing outside the United States, the
Company is subject to foreign regulatory requirements governing
human clinical trials and marketing approval for drugs. The
requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country
to country.
Patents and Proprietary Rights
The Company's success may depend in large measure upon its
ability to obtain patent protection for its drugs, maintain
confidentiality and operate without infringing upon the
proprietary rights of third parties. The Company has obtained
patent coverage, either directly or through licenses from third
parties, for certain of its drugs. It has licensed (i) four
U.S. patents on CPC-111 which have expiration dates ranging
from 2002 to 2008 and (ii) one U.S. patent on CPC-211 which has
an expiration date of 2003. During the fiscal year ended July
31, 1996, the Company also received a notice of allowance on a
U.S. patent on a novel dosing regimen for CPC-211.
The Company has filed patent applications with respect to other
programs and expects to file additional applications in the
future. There can be no assurance that any of these patent
applications will be approved, except where claims have already
been examined and allowed, or that the Company will develop
additional proprietary products that are patentable. Nor can
there be any assurance that any patents issued to the Company
or its licensors will provide the Company with any competitive
advantages or will not be challenged by third parties or that
patents issued to others will not have an adverse effect on the
ability of the Company to conduct its business. Furthermore,
because patent applications in the United States are maintained
in secrecy until issue, and because publication of discoveries
in the scientific and patent literature often lag behind actual
discoveries, the Company cannot be certain that it was the
first chronologically to make the inventions covered by each of
its pending U.S. patent applications, or that it was the first
to file patent applications for such inventions. In the event
that a third party has also filed a U.S. patent application for
any of its inventions, the Company may have to participate in
interference proceedings declared by the United States Patent
and Trademark Office to determine priority of the invention,
which could result in substantial cost to the Company, even if
the eventual outcome is favorable to the Company. In addition,
there can be no assurance that the Company's U.S. patents,
including those of its licensors, would be held valid by a
court of law of competent jurisdiction. If patents are issued
to other companies that contain competitive or conflicting
claims which ultimately may be determined to be valid, there
can be no assurance that the Company would be able to obtain a
license to any of these patents.
Under Title 35 of the United States Code, as amended by the
General Agreement on Tariffs and Trade implementing the Uruguay
Round Agreement Act of 1994 ("GATT"), patents that issue from
patent applications filed prior to June 8, 1995, will enjoy a
17year period of enforceability as measured from the date of
patent issue while those that issue from applications filed on
or after June 8, 1995 will enjoy a 20-year period of
enforceability as measured from the date the patent application
was filed or the first claimed priority date, whichever is
earlier. Patents that issue from applications filed on or after
June 8, 1995, may be extended under the term extension
provisions of GATT for a period up to five years to compensate
for any period of enforceability lost due to interference
proceedings, government secrecy orders or appeals to the Board
of Patent Appeals or the Federal Circuit.
Under the Drug Price Competition and Patent Term Restoration
Act of 1984, including amendments implemented under GATT (the
"Patent Term Restoration Act"), the period of enforceability of
a first or basic product patent or use patent covering a drug
may be extended for up to five years to compensate the patent
holder for the time required for FDA regulatory review of the
product. This law also establishes a period of time following
FDA approval of certain drug applications during which the FDA
may not accept or approve applications for similar or identical
drugs from other sponsors. Any extension under the Patent Term
Restoration Act and any extension under GATT are cumulative.
There can be no assurance that the Company will be able to take
advantage of such patent term extensions or marketing
exclusivity provisions of these laws. While the Company cannot
predict the effect that such changes will have on its business,
the adoption of such changes could have a material adverse
effect on the Company's ability to protect its proprietary
information and sustain the commercial viability of its
products. Furthermore, the possibility of shorter terms of
patent protection, combined with the lengthy FDA review process
and possibility of extensive delays in such process, could
effectively further reduce the term during which a marketed
product could be protected by patents.
The Company also relies on trade secrets and proprietary know-
how. The Company has been and will continue to be required to
disclose its trade secrets and proprietary know-how to
employees and consultants, potential corporate partners,
collaborators and contract manufacturers. Although the Company
seeks to protect its trade secrets and proprietary know-how, in
part by entering into confidentiality agreements with such
persons, there can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies
for any breach or that the Company's trade secrets will not
otherwise become known or be independently discovered by
competitors.
Scientific Advisory and Clinical Trials Advisory Boards
Scientific Advisory Board
The Company currently has a Scientific Advisory Board ("SAB")
whose members periodically advise the Company with respect to
the Company's scientific research and development programs.
The SAB does not meet as a group; rather individual member(s)
are contacted for advice on an as-needed basis. The members are
compensated through the grant of stock options and, if meetings
are held, will receive fees for attending meetings as well as
reimbursement for expenses. The Company has hired certain SAB
members to perform services for the Company such as assay
development and compound preparation.
The members of the Company's SAB are:
Name and Affiliation / Area of Expertise
Chung Hsu, M.D., Ph.D.
Director of Stroke Clinical Trials,
Washington University, St. Louis
School of Medicine
Animal models of stroke/clinical
trials
Ronald Hayes, Ph.D.
Professor of Neurosurgery,
University of Texas, Houston
Animal models of head trauma
Bruce P. Bean, Ph.D.
Professor of Neurobiology,
Harvard University
Neuronal ion channels
Robert Parks, M.D., Ph.D.
Professor of Pharmacology,
Brown University
Biochemical pharmacology
John Olney, M.D.
Professor of Psychiatry and Neuropathology,
Washington University, St. Louis
Excitotoxicity; animal models of stroke
Edward J. Cragoe, Ph.D.
Former Senior Director of Medicinal
Chemistry, Merck Sharp & Dohme Research
Laboratories Medicinal chemistry/ion
channels
K.C. Nicolaou, Ph.D.
Head of Chemistry,
The Scripps Research Institute
Professor of Chemistry,
University of California, San Diego
Medicinal chemistry
Harold Kimelberg, Ph.D.
Professor, Division of Neurology,
Albany Medical College
Glial cell release of glutamate
Elie Abushanab, Ph.D.
Professor of Medicinal Chemistry
and Chemistry
College of Pharmacy
University of Rhode Island
Medicinal chemistry/adenosine
Thomas J. Maloney
President
The Iso-Tex Companies
Friendswood, Texas
Radioisotopes/Nuclear Medicine
Claude Wasterlain, M..D.
Chief of Neurology Services
Sepulveda VA Medical Center/
Professor of Neurology
University of California Los Angeles
Stroke and epilepsy
Clinical Trials Advisory Boards
The Company has assembled two Clinical Trials Advisory Boards
("CTABs"), composed of physician "thought leaders" in the
cardiology and neurology area, to assist in the planning,
design and execution of the Company's clinical trials involving
CPC-111 and CPC-211. The individuals who constitute each of
the CTABs are paid consultants to the Company and are listed
below:
Cardiovascular Clinical Trials Advisory Board
Eric J. Topol, M.D. (Chair)
Chairman, Department of Cardiology,
Director, Center for Thrombosis and Vascular
Biology, Cleveland Clinic and Foundation
Robert M. Califf, M.D.
Associate Professor of Medicine,
Duke University Medical Center
David R. Holmes, Jr., M.D.
Associate Professor of Medicine,
Mayo Clinic Medical School
Cerebrovascular Clinical Trials Advisory
Board
William G. Barsan, M.D. (Chair)
Director of Emergency Medicine,
University of Michigan Medical School
Charles G. Brown, M.D.
Associate Professor & Research
Director, Department of Emergency
Medicine
Ohio State University
Randall M. Chestnut, M.D.
Oregon Health Sciences Center
School of Medicine, Division of
Neurosurgery Portland, Oregon
Patrick D. Lyden, M.D.
Chief, Stroke Clinic
University of California, San Diego
Anthony Marmarou, Ph.D.
Medical College of Virginia
Division of Neurosurgery
Richmond, Virginia
The members of the SAB and the CTABs may be employed by or have
consulting agreements with entities other than the Company,
some of which may compete with the Company. These other
obligations may limit the availability of the members to the
Company. Most are not expected to participate actively in the
Company's development. Certain of the institutions with which
the members are affiliated may have regulations or policies
which are unclear with respect to the ability of such persons
to act as part-time consultants or in other capacities for a
commercial enterprise. Regulations or policies now in effect or
adopted in the future may limit the ability of the members to
consult with the Company. The loss of the services of certain
of the members could adversely affect the Company.
Furthermore, inventions or processes discovered by the SAB and
CTAB members will not, unless otherwise agreed, become the
property of the Company but will remain the property of such
persons or of their full-time employers. In addition, the
institutions with which the members are primarily affiliated
may make available the research services of their scientific
and other skilled personnel, including the members, to entities
other than the Company. In rendering such services, such
institutions may be obligated to assign or license to a
competitor of the Company patents and other proprietary
information which may result from such services, including
research performed by a member for a competitor of the Company.
Scientific and Other Personnel
As of September 30, 1996, the Company had 31 full-time
employees, seven of whom hold Ph.D. degrees, one of whom also
holds an M.D. degree and one of whom holds a J.D. degree.
Twelve of the fulltime employees are employed in finance and
general administration, seven in clinical and regulatory
affairs and quality assurance, seven in research and
development, and five in sales and marketing, customer service
and business development. The Company believes that it
maintains good relations with its employees.
Executive Officers of Registrant
<TABLE>
<CAPTION>
Set forth below is certain information with respect to the
executive officers of the Company at September 30, 1996:
Name Age Position
<S> <C> <C>
Paul J. Marangos, Ph.D. 49 Chairman of the Board,
President and Chief
Executive Officer
Stephen C. Eisold 50 Executive Vice President of
Commercial Development and
Chief Operating Officer
Anthony W. Fox, M.D., Ph.D. 40 Vice President, Drug
Development
David W. Nassif, J.D. 42 Vice President, Chief
Financial
Officer and Secretary
</TABLE>
Paul J. Marangos, Ph.D., has been President and Chairman of the
Board since he founded the Company in November 1990. In February
1993, he became Chief Executive Officer. From April 1988 to
November 1990, he was Senior Director of Research at Gensia
Pharmaceuticals, Inc., a biotechnology company. From 1980 to
1988, he was Chief of Neurochemistry in the Biological Psychiatry
Branch, National Institute of Mental Health. Dr. Marangos
obtained his doctorate in biochemistry from the University of
Rhode Island and did his post-doctoral work at the Roche
Institute of Molecular Biology. He has published 250 research
papers and four books in the field of biochemistry and
pharmacology. Dr. Marangos' most recent book, published in July
1992, is entitled Emerging Strategies in Neuroprotection. He is
a member of the Society for Neuroscience and the American Academy
for the Advancement of Science. Dr. Marangos is the founding
editor of the Journal of Molecular Neuroscience published by
Humana Press.
Stephen C. Eisold joined the Company in May 1996 as the
Executive Vice President of Commercial Development and Chief
Operating Officer. From February 1990 to May 1996, he held
various executive positions at Gensia Inc., most recently as
Vice President and General Manager of the North American
Pharmaceuticals Division. Prior thereto, Mr. Eisold held
various sales, marketing and commercial development positions
in the pharmaceutical industry since 1973. He received his
bachelor of science from Springfield College and his masters in
business administration from Rockhurst College.
Anthony W. Fox, M.D., Ph.D., joined the Company in April 1994
as the Vice President of Drug Development. From March 1990 to
April 1994, he was employed by Glaxo, Inc., a pharmaceutical
company, the last three years as Director, Cardiovascular and
Anesthesiology Clinical Research. Dr. Fox was Group Leader,
Division of Clinical Affairs, Norwich Division, of Procter &
Gamble, a consumer products company, from May 1987 to March
1990. He received his bachelor of science in pharmacology with
honors, his bachelor of medicine, bachelor of surgery and
doctor of medicine degrees from the University of London, is a
member of the Royal Colleges of Physicians and is a fully
registered medical practioner in the United Kingdom.
David W. Nassif, J.D., joined the Company in August 1993 as
Vice President, Chief Financial Officer and Secretary. From
January 1993 to August 1993, he was a consultant to various
public and private companies in the areas of capital raising,
investor relations and securities compliance. From July 1992
to January 1993, he was the Vice President, Chief Financial
Officer and Assistant Secretary of 999, Inc., a diversified
manufacturing and environmental services company. From December
1987 to July 1992, he was the Vice President and Assistant
Secretary of Showscan Corporation, a technology company. Mr.
Nassif holds honors finance, management information systems and
law degrees from the University of Virginia.
Item 2. Properties.
The Company leases and occupies two buildings in Carlsbad,
California at a total monthly rental of $30,000. The Company's
executive offices and distribution facility are located in
14,595 square feet of space located at 2714 Loker Avenue West
(the "2714 Space") and the Company's pre-clinical research
group and laboratories are located in 8,547 square feet at
2732 Loker Avenue West (the "2732 Space"). The lease on the
2714 Space commenced April 1996 and has a term of 69 months.
The lease on the 2732 Space commenced in December 1993 and
has a term of 81 months. Both leases have clauses providing
for rent increases at various points in time during the term
of the leases.
Item 3. Legal Proceedings.
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended
July 31, 1996.
PART II.
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters.
The Common Stock of the Company was quoted on the Nasdaq
SmallCap Market under the symbol "CYPR" from November 3, 1992,
the date of the Company's initial public offering, until April
11, 1995 when it commenced trading on the Nasdaq National
Market System under the same trading symbol. The Redeemable
Class B Warrants are also quoted on the Nasdaq National Market
System under the symbol "CYPRZ". The following table sets forth
for the calendar quarters indicated, the high and low sales
prices of the Common Stock on the Nasdaq SmallCap Market or the
Nasdaq National Market System, as the case may be, as reported
in published financial sources. On May 8, 1995, the Company
split its stock on a 2.5:1 basis. All of the prices shown in
the table have been adjusted for the split.
<TABLE>
<CAPTION>
Year ended July 31, 1996 High Low
<S> <C> <C>
First Quarter $9.13 $3.00
Second Quarter $6.13 $3.13
Third Quarter $6.19 $4.56
Fourth Quarter $6.13 $3.63
Year ended July 31, 1995 High Low
First Quarter $5.50 $5.00
Second Quarter $5.90 $4.60
Third Quarter $6.70 $3.20
Fourth Quarter $9.50 $6.88
</TABLE>
The last sales price of the Common Stock on October 21, 1996
was $4.00.
According to a survey as of September 23, 1996, there were
1,562 beneficial owners of the Common Stock.
The Company has not paid any dividends since its inception and
does not intend to pay any dividends on its Common Stock in the
foreseeable future.
Item 6. Selected Financial Data.
The following table sets forth certain financial data with
respect to the Company. The selected financial data should be
read in conjunction with the Company's Financial Statements
(including the Notes thereto) and "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Report.
<TABLE>
<CAPTION>
Years
ended
July
31,
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net sales $ - $ - $ - $ - $ 1,275
Gross Profit - - - - 870
Total operating 359 1,715 2,565 3,910 4,988
expenses
Loss from operations (359) (1,715) (2,565) (3,910) (4,118)
Other income, net 51 121 190 797 1,028
Net loss (308) (1,594) (2,375) (3,113) (3,090)
Net loss per share (0.07) (0.28) (0.32) (0.32) (0.27)
Shares used in
computing
net loss per 4,350 5,637 7,357 9,860 11,518
share
July
31,
Balance Sheet Data: 1992 1993 1994 1995 1996
Cash, cash
equivalents and
short-term
investments $ 220 4,444 5,666 13,442 15,997
Working capital 27 4,311 5,284 12,934 15,384
Total assets 303 4,900 6,206 14,175 [20,267]
Long-term debt - 160 240 195 [6,624]
Common stock 257 6,748 9,927 20,945 [23,421]
Accumulated deficit (310) (1,904) (4,279) (7,392) (10,482)
Total shareholders'
equity 110 4,578 5,476 13,366 [12,635]
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Except for the historical information contained herein, the
following discussion contains forward-looking statements that
involve risks and uncertainties, including statements regarding
the period of time during which the Company's existing capital
resources and income from various sources will be adequate to
satisfy its capital requirements. The Company's actual results
could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include but
are not limited to, those discussed in this section, as well as
in the sections entitled "Business", "Licenses",
"Manufacturing", "Sales and Marketing", "Competition",
"Government Regulation", "Patents and Proprietary Rights",
those discussed in the S-3 Registration Statement File No. 333-
3507 filed with U.S. Securities and Exchange Commission, as
well as those discussed in any documents incorporated by
reference herein or therein..
The Company was founded in 1990, commenced its research and
development activities in 1991, completed an initial public
offering (the "IPO") in November 1992, commenced clinical
trials in December 1994 and acquired two FDA-cleared products,
Glofil and Inulin, (the "Acquisitions") in August 1995. The
Company has sustained an accumulated deficit of $10,480,000
from inception through July 31, 1996. As the Company will not
have significant positive net operating cash flow for the next
few years and the Company's research and development, clinical
testing and regulatory, sales and marketing and general and
administrative expenses during these years will be substantial
and increasing, the Company expects to incur increasing losses
for the foreseeable future.
Results of Operations
Year ended July 31, 1996 compared to year ended July 31, 1995
During the fiscal year ended July 31, 1996, the Company
sustained a loss of $3,090,000 (or $.27 per share) compared to
a loss of $3,113,000 (or $.32 per share) for the prior fiscal
year. The gross profit of $870,000 on sales of Glofil and
Inulin and other income of $1,028,000 (principally interest
income) during the current fiscal year was offset by $4,988,000
in expenses in the sales and marketing, general and
administrative, clinical testing and regulatory and research
and development areas. During the prior fiscal year, there were
no product sales and other income of $797,000 (principally
interest income) was offset by $3,910,000 in expenses in the
above areas.
During the current year, the Company spent $343,000 on sales
and marketing, principally in the hiring of a field sales force
and a customer service function and in various marketing and
promotional programs. No such expense was recorded in the prior
fiscal year as the Company was still in the development stage
and had not yet acquired Glofil and Inulin.
General and administrative expense increased $671,000 during
the current year, principally due to $438,000 in amortization
expense of the purchased technology related to the acquisition
of Glofil and Inulin. The Company also recorded a $196,000
increase in the amortization of deferred compensation related
to the issuance of stock, stock options and warrants at prices
below market value and a $178,000 increase in salary expense
due to increased hiring of staff.
Clinical testing and regulatory expense decreased by $149,000
during the current year, principally due to a decrease of
$209,000 in contract research organization costs because of a
lower accrual for the Company's Phase II congestive heart
failure trial on CPC-111 and a decrease of $177,000 in
licensing milestone expenses, offsetting increases in other
areas, including a $180,000 increase in salary expense due to
additional hiring. During the prior year, the Company recorded
a one-time milestone expense from the issuance of a non-
qualified stock option grant to the licensor of CPC-211 as a
milestone payment for the completion of that drug's Phase I
trial.
Research and development increased by $214,000 during the
current year due to increases in salary expense, the use of
outside collaborators and expense related to the Phase II Small
Business Innovation Research Grant for the neuronal calcium
channel blocker program (which grant was completed during the
year) and the six-month Phase I Small Business Innovation
Research Grant for the CPC-111 pro-drug program (which was
awarded to the Company during the current year).
In addition, net interest and other income for the current year
increased by $231,000 principally due to (i) the interest
income from a larger investment portfolio as a result of the
various private placements during the year (described below in
Liquidity and Capital Resources) and the Class A Warrant
Program (also described below in Liquidity and Capital
Resources), which was not available for all of the prior-year
period because the program began in November 1994 and was
completed in February 1995 and (ii) fees and interest earned on
a loan that the Company made during the current year to a
financial advisor.
Year ended July 31, 1995 compared to year ended July 31, 1994
During the fiscal year ended July 31, 1995 (the "1995 Year"),
the Company sustained a loss of $3,113,000 (or $.32 per share)
compared to a loss of $2,375,000 (or $.32 per share) for the
prior fiscal year. Increased payroll caused increases in
research and development, clinical testing and regulatory and
general and administrative expenses. Clinical testing and
regulatory expenses during the 1995 Year also reflected the
commencement and completion of the Phase I trial on CPC-211
(and the expense related to a milestone payment to the licensor
of CPC-211 to the Company in the form of a common stock
purchase warrant), the commencement of the Phase II trial on
CPC-111 in congestive heart failure patients and the
commencement of the Phase II trial on CPC-111 in cardiac
surgery patients. Financial advisory and investor relations
costs accounted for significant increases in general and
administrative expenses during the 1995 Year, including
$315,000 of expense recognized in connection with the issuance
(and subsequent repricing) of a warrant as compensation for
services performed through July 31, 1995.
During the 1995 Year, the Company received $250,000 of income
from the Phase II Small Business Innovation Research Grant
awarded to the Company by the National Institutes of Health in
July 1994 (the "Grant"). Research and development expense for
the quarter includes expenses incurred in connection with the
Grant.
In addition, net interest and other income for the 1995 Year
increased 269% to $590,000 due principally to the interest
income from a larger investment portfolio and the investment of
the proceeds of the Special Class A Warrant Program at higher
rates than the Company's then-existing investment portfolio for
similar securities and maturities.
Liquidity and Capital Resources
[The Company has principally funded its activities to date
through its initial public offering ("IPO") in November 1992,
which raised $5,951,000, subsequent exercises of its
Redeemable Class A Warrants in 1994 and early 1995, which
raised $10,497,000, exercises by the underwriter of the IPO of
its unit purchase options (and the Redeemable Class A Warrants
within such options), which raised $1,681,000, that it had
received as part of its compensation for the IPO and private
placements of mandatorily convertible notes during April and July 1996,
(the "Notes") which raised $8,000,000. At July 31, 1996, the Company had
cash, cash equivalents and short-term investments of
$15,997,000, compared to $13,442,000 at July 31, 1995. The
period-to-period increase was principally due to the private
placement of convertible notes. This factor also contributed to
the increase in working capital at July 31, 1996 to
$15,384,000, compared to $12,934,000 at July 31, 1995.]
[The Notes are convertible at the option of the investors into
shares of the Company's Common Stock at various dates from January
31, 1997 through July 31, 1999 at a discount to the market price of
the stock immediately preceding conversion, ranging from 15% to 25%,
with the actual discount depending on the length of time each
investor has held the Note being converted. The Notes must be
converted at various dates through July 31, 1999. The Company is
required to register with the SEC the shares of Common Stock issuable
upon conversion of the Notes on or prior to the expiration of the
allowable conversion periods. The Notes were originally classified
as a component of shareholders' equity for several reasons,
including the fact that they are non-interest-bearing and
convertible only into Common Stock of the Company, absent unusual
circumstances.]
[However, on August 26, 1997, in conjunction with an SEC review of
a registration statement filed by the Company and in consideration
of certain positions formally adopted by the SEC in March 1997,
the Company reclassified the Notes to long-term debt. The Notes
are recorded net of the $1,582,935 discount available upon
conversion (assuming full conversion at the earliest possible
date(s), and the discount represents an effective interest rate of
33%. The discount has been added to Common Stock and will be
amortized to expense in fiscal 1997.]
The Company expects that its cash needs will increase
significantly in future periods due to expansion of its
research
and development programs, increased clinical testing activity,
growth of administrative, clinical and laboratory staff and
their related equipment and space needs. Management believes
that the Company's working capital will be sufficient to fund
the operations of the Company for approximately 36 months
dependent, in part, on the timing of the commencement of each
phase of the clinical trials on CPC-111 and CPC-211 and the
funding priorities that it gives its various research programs,
the results of clinical tests and research programs; competing
technological and market developments; the time and costs
involved in obtaining regulatory approvals and in obtaining,
maintaining and enforcing patents; the cost of product
acquisitions and their resulting cash flows and other factors.
The Company expects to seek additional funds through exercises
of its currently outstanding options and warrants, public or
private equity financings, collaborations or from other
sources. There can be no assurance that funds can be obtained
on desirable terms or at all. The Company may seek to raise
additional capital whenever conditions in the financial markets
are favorable, even if the Company does not have an immediate
need for additional cash at that time.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements of the Company and Report of
Independent Auditors are filed as exhibits hereto, listed under
Item 14 of this Report and incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
The information regarding directors is hereby incorporated by
reference to the section entitled "Election of Directors" in
the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the
Company's 1997 Annual Meeting of Shareholders (the "Proxy
Statement").
The information regarding executive officers appears under the
section entitled "Executive Officers of Registrant" appearing
in Item 1 of Part I of this Report.
Item 11. Executive Compensation.
The information required by this item is hereby incorporated by
reference to the section entitled "Executive Compensation" in
the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this item is hereby incorporated by
reference to the section entitled "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy
Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is hereby incorporated by
reference to the section entitled "Transactions with Related
Parties" in the Proxy Statement.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K.
(a) (1)(2) Financial Statements and Schedules.
The financial statements are incorporated herein by reference
from Exhibit 99.1, which begins with the Table of Contents on
Page F- 1.
(a) (3) Exhibits.
See Exhibit Index on page 29.
The following management compensation plans and arrangements
are required to be filed as exhibits pursuant to Item 14(c) of
this report.
Exhibit
Number Description
10.1 Forms of Incentive Stock Option and Nonstatutory
Stock Option.*
10.2 Amended 1992 Stock Option Plan.**
10.3 Form of Stock Purchase and Right of First
Refusal Agreement, with related schedule.*
10.4 Employment Agreement, dated July 10, 1991 as amended
and restated September, 1992, between the Registrant
and Paul J. Marangos, Ph.D. *
10.5 Amendment No. 1 to Employment Agreement, dated May
9,1994, between the Registrant and Paul J. Marangos, Ph.D.***
10.6 Amendment No. 2 to Employment Agreement, dated March 9,
1995, between the Registrant and Paul J. Marangos, Ph.D.***
10.7 Amendment No. 3 to Employment Agreement, dated
October 1, 1996, between the Registrant and Paul J. Marangos, Ph.D.
10.8 1993 Non-Employee Directors Stock Option Plan and
related form of Nonstatutory Stock Option. ****
____________
* Filed as an exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-51682, and
incorporated herein by reference.
** Filed as an exhibit to the Registrant's Form 10-Q for the
period ended January 31, 1995, and incorporated herein by
reference.
*** Filed as an exhibit to the Registrant's Form 10-K for the fiscal
year ended July 31, 1994.
**** Filed as an exhibit to the Registrant's Form 10-K for the fiscal
year ended July 31, 1993.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fourth
quarter of 1996.
(c) Exhibits.
The exhibits required by this Item are listed under Item
14 (a) (3).
(d) Financial Statement Schedules.
The financial statement schedule required by this Item is
incorporated herein by reference from Exhibit 99.1, which
begins with the Table of Contents to the Financial Statements
on Page F-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City and County of San Diego, State of
California, on the [26th day of August, 1997].
CYPROS PHARMACEUTICAL CORPORATION
(Signature)
Paul J. Marangos
Chairman of the Board, President and Chief Executive Officer
*
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
Paul J. Marangos Chairman of the Board [August 26,1997]
(Signature) President and Chief Executive
Officer and Director
(Principal Executive Officer)
David W. Nassif Vice President, Chief [August 26,1997]
(Signature) Financial Officer
and Secretary
(Principal Financial and Accounting Officer)
*--------------- Director [August 26,1997]
(Signature)
Bernard B. Levine Director [August 26,1997]
*---------------- Director [August 26,1997]
(Signature)
*---------------- Director [August 26,1997]
(Signature)
[*By: David W. Nassif
- ----------------
David W. Nassif, Attorney-in-fact]
Exhibit Index
Exhibit
Number Description Page
No.
2.1 (1) Pharmaceutical Products Purchase and Distribution
Support Agreement as of August 9, 1995 by and among Iso-Tex
Diagnostics, Inc., Cypros Pharmaceutical Corporation and Thomas
J. Maloney. (2)
2.2 (1) Glofil Contract Manufacturing and Royalty
Agreement as of August 9, 1995 by and among Iso-Tex
Diagnostics, Inc., Cypros Pharmaceutical Corporation and Thomas
J. Maloney. 2)
2.3 (1) Merger Agreement as of August 9, 1995 among
Cypros Pharmaceutical Corporation, Iso-Tex Diagnostics "B", Inc. and
Jean and Thomas Maloney. (2)
3.1 (3) Restated Articles of Incorporation of the Registrant.
3.2 (4) Amendment to Restated Articles of Incorporation.
3.3 (3) Bylaws, as amended.
4.1 (3) Specimen stock certificate.
4.3 (3) Specimen Redeemable Class B Warrant.
4.5 (3) Form of Warrant Agreement.
4.6 Reference is made to Exhibits 3.1 and 3.2.
10.1 (3) Forms of Incentive Stock Option and Nonstatutory Stock
Option. 10.2 (4) Amended 1992 Stock Option Plan.
10.3 (3) Form of Restricted Stock Purchase Agreement, with related
schedule.
10.4 (3) Employment Agreement, dated July 10, 1991 as amended
and restated September 1, 1992, between the Registrant and Paul
J. Marangos, Ph.D
.
10.5 (5) Amendment No. 1 to Employment Agreement, dated May 9,
1994, between the Registrant and Paul J. Marangos, Ph.D.
10.6 (6) Amendment No. 2 to Employment Agreement, dated March
9, 1995, between the Registrant and Paul J. Marangos, Ph.D.
10.7 (7) 1993 Non-Employee Directors Stock Option Plan and
related form of Nonstatutory Stock Option.
10.8 Amendment No. 3 to Employment Agreement, dated
October 1, 1996, between the Registrant and Paul J.
Marangos, Ph.D. 30
10.9 (3) License Agreement, dated as of August 20, 1992, between
the Registrant and Angel K. Markov, M.D. (with certain
confidential infomation in brackets deleted). (7)
10.11 (3) License Agreement, dated as of August 27, 1992, between
the Registrant and University E..M., Inc. (with certain
confidential information in brackets deleted). (7)
10.12 (4) Assignment of and Amendment to License Agreement by and
between University E.M., Inc., University of Cincinnati and the
Registrant.
10.13 (6) License and Support Agreement, dated as of February 18,
1993, between the Registrant and Elie Abushanab, Ph.D. (with
certain confidential information in brackets deleted). (8)
10.14 (9) Note Purchase Agreement dated July 11, 1996 by and
among Cypros Pharmaceutical Corporation and Paresco, Inc.
10.15 (9) Note Purchase Agreement dated July 31, 1996 by and
among Cypros Pharmaceutical Corporation and Cameron Capital
Ltd.
23.1 Consent of Ernst & Young LLP, Independent Auditors. 31
24.1 Power of Attorney. Reference is made to page 27.
27. Financial Data Schedule - as filed electronically by
Registrant (for SEC use only)
99.1 Financial Statements. 32
______________
(1) Filed as an exhibit to the Registrant's Form 8-K dated
August 10, 1995 and incorporated herein by reference.
(2) Certain confidential portions deleted pursuant to an
application for Order Granting Confidential Treatment Under the
Securities Exchange Act of 1934 and Rule 24b-2 Thereunder filed
concurrently with the Form 8-K.
(3) Filed as an exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-51682, and
incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Form 10-Q for
the period ended January 31, 1995, and incorporated herein by
reference.
(5) Filed as an exhibit to the Registrant's Form 10-K for
the fiscal year ended July 31, 1994.
(6) Filed as an exhibit to the Registrant's Form 10-K for
the fiscal year ended July 31, 1993.
(7) Certain confidential portions deleted pursuant to Order
Granting Application Under the Securities Act of 1933 and Rule
406 Thereunder Respecting Confidential Treatment, dated November
3, 1992.
(8) Certain confidential portions deleted pursuant to
Order Granting Application Pursuant to Rule 24B-2 Under the
Securities Exchange Act of 1934 Respecting Confidential
Treatment, dated December 20, 1993.
(9) Filed as an exhibit to the Registrant's Form 8-K
dated September 20, 1996 and incorporated herein by reference.
Form 10-K Items 14(a) (1) and (2)
Cypros Pharmaceutical Corporation
Years ended July 31, 1996, 1995 and 1994
with Report of Independent Auditors
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-3 and S-8) of our report dated August 26,
1996, with respect to the financial statements of Cypros
Pharmaceutical Corporation included in the Annual Report
(Form 10-K/A) for the year ended July 31, 1996, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
(Signature)
San Diego, California
[August 26, 1997]
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<CASH> 8,306,752
<SECURITIES> 7,690,297
<RECEIVABLES> 149,626
<ALLOWANCES> 0
<INVENTORY> 63,386
<CURRENT-ASSETS> 61,409
<PP&E> 885,314
<DEPRECIATION> (277,108)
<TOTAL-ASSETS> 20,266,525
<CURRENT-LIABILITIES> 887,021
<BONDS> 0
6,395,574
0
<COMMON> 23,421,428
<OTHER-SE> (10,786,541)
<TOTAL-LIABILITY-AND-EQUITY> 20,266,525
<SALES> 1,275,240
<TOTAL-REVENUES> 1,275,240
<CGS> 405,142
<TOTAL-COSTS> 405,142
<OTHER-EXPENSES> 4,988,408
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,953
<INCOME-PRETAX> (3,090,108)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,090,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,090,108)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> 0
</TABLE>
Cypros Pharmaceutical Corporation
Form 10-K Items 14(a) (1) and (2)
Contents
Report of Ernst & Young LLP, Independent Auditors F-2
Financial Statements (Item 14(a) (1)):
Balance Sheets F-3
Statements of Operations F-4
Statements of ShareholdersO Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
Financial Statement Schedules (Item 14(a) (2)):
All financial statement schedules are omitted because the
information described therein is not applicable, not required
or is furnished in the financial statements or notes thereto.
Report of Independent Auditors
The Board of Directors and Shareholders
Cypros Pharmaceutical Corporation
We have audited the accompanying balance sheets of Cypros
Pharmaceutical Corporation as of July 31, 1996 and 1995, and
the related statements of operations, shareholders' equity,
and cash flows for each of the three years in the period ended
July 31, 1996. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Cypros Pharmaceutical Corporation at July 31, 1996
and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended July 31, 1996 in
conformity with generally accepted accounting principles.
[ERNST & YOUNG LLP]
(Signature)
[San Diego, California]
[August 26, 1996, except for Note 4, as to which the date is
August 26, 1997.]
<TABLE>
<CAPTION>
Cypros Pharmaceutical Corporation
Balance Sheets
July 31,
1996 1995
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $8,306,752 $5,026,745
Short-term investments, held
to maturity (Notes 1 and 2) 7,690,297 8,415,250
Accounts receivable 149,626 -
Inventory 63,386 -
Prepaid expenses and other
current assets 61,409 25,910
Total current assets 16,271,470 13,467,905
Property, equipment and leasehold
improvements, net (Note 2) 608,206 411,651
Purchased technology, net of
accumulated amortization of
$438,238 at July 31, 1996
(Note 1) 2,629,427
[Deferred financing costs (Note 1) 520,011 -]
Licenses and patents, net of
accumulated amortization of
$87,277 and $61,418 at
July 31, 1996 and 1995,
repectively (Note 4) 111,231 99,591
Deposits and other assets 126,180 195,692
[Total assets $ 20,266,525 $14,174,839]
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 119,092 138,537
Accrued compensation 155,748 83,594
Other accrued liabilities 231,864 189,713
Purchased asset obligation
(Note 1) 200,000 -
Current portion of long-term
debt (Note 3) 99,282 99,282
Current portion of capital
lease obligation (Note 4) 81,035 22,517
Total current liabilities 887,021 533,643
Long-term debt (Note 3) 41,367 140,650
Capital lease obligations
(Note 4) 187,265 54,149
Deferred rent (Note 4) 120,411 80,519
Commitments (Note 4)
[Mandatorily convertible notes
(Note 4) 6,395,574 -]
Shareholders' equity: (Notes 4 and 5)
Common stock, 30,000,000 shares
authorized, 11,613,748
and 11,352,017 shares issued
and outstandingas of July 31,
1996and 1995, respectively 23,421,428 20,944,995
Deferred compensation (304,309) (186,993)
Accumulated deficit (10,482,232) (7,392,124)
Total shareholders' equity 12,634,887 13,365,878
Total liabilities and
shareholder's equity
$ 20,266,525 $14,174,839
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Cypros Pharmaceutical
Corporation
Statements of Operations
Years
ended July
31,
1996 1995 1994
<S> <C> <C> <C>
Net sales $ 1,275,240 - -
Cost of sales 405,142 - -
Gross profit 870,098 - -
Operating expenses:
Sales and marketing 343,054 -
General and
administrative 2,254,000 1,583,420 1,015,666
Clinical testing and
regulatory 1,389,128 1,537,964 1,022,134
Research and development 1,002,226 788,424 526,835
Total operating expenses 4,988,408 3,909,808 2,564,635
Loss from operations (4,118,310) (3,909,808) (2,564,635)
Research grant income 270,510 250,000 -
Interest income, net (Note
3) 757,692 547,107 189,372
Net loss $ (3,090,108) $(3,112,701) $ (2,375,263)
Net loss per share $ (0.27) $ (0.32) $ (0.32)
Shares used in computing net
loss per share 11,518,169 9,859,857 7,357,960
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Cypros Pharmaceutical Corporation
Statements of Shareholders' Equity
For each of the three years ended July 31, 1996,
1995 and 1994
*
Common stock
Shares Amount
<S> <C> <C>
Balance at July 31, 1993 6,083,329 $6,748,419
Exercise of warrants 1,343,750 725,625
Exercise of Class A warrants (Program I) 760,306 2,355,123
Issuance of common stock for cash and
services 35,650 83,641
Common stock repurchased (203,255) (53,205)
Deferred compensation related to grant of
stock options - 66,958
Amortization of deferred compensation - -
Net loss - -
Balance at July 31, 1994 8,019,780 9,926,561
Exercise of Class A warrants (program II) 2,605,180 8,205,215
Exercise of Unit Purchase Options and
underlying Class A warrants 543,745 1,681,266
Exercise of stock options 183,312 528,924
Deferred compensation related to grant of
stock options and warrants - 603,029
Amortization of deferred compensation - -
Net loss - -
Balance at July 31, 1995 11,352,017 20,944,995
Discount on mandatorily convertible notes - 1,582,935
Issuance of common stock, net of offering
costs 162,500 940,956
Issuance of common stock in business
acquisitions 169,231 1,032,309
Issuance of common stock for services 200,000 284,375
Common stock repurchased (280,000)(1,540,000)
Exercise of stock options 10,000 35,163
Deferred compensation related to grant of
stock options - 140,695
Amortization of deferred compensation - -
Net loss - -
Balance at July 31, 1996 11,613,748 $23,421,428
</TABLE>
Total
Deferred Accumulate Shareholder's
Compensation Deficit Equity
[C] [C] [C]
$(266,273) $1,904,16 $4,577,986
- - 725,625
- - 2,355,123
- - 83,641
51,624 - (1,581)
(66,958) - -
110,667 - 110,667
- (2,375,263) (2,375,263)
(170,940) (4,279,423) 5,476,198
- - 8,205,215
- - 1,681,266
- - 528,924
(110,842) - 492,187
94,789 - 94,789
- (3,112,701) (3,112,701)
(186,993) (7,392,124) 13,365,878
- - 1,582,935
- - 940,956
- - 1,032,309
(284,375) - -
- - (1,540,000)
- - 35,163
(140,695) - -
307,754 - 307,754
- (3,090,108) (3,090,108)
$(304,309) $(10,482,232) $12,634,887
See accompanying notes.
<TABLE>
<CAPTION>
Cypros Pharmaceutical Corporation
Statements of Cash Flows
1996 1995 1994
<S> <C> <C> <C>
Operating activities
Net loss $(3,090,108) $(3,112,701) $(2,375,263)
adjustments to reconcile net loss to
net cash used in operating
activities:
Amortization of deferr 307,754 94,789 110,667
compensation
Expense related to warrant
issuances - 492,187 -
Depreciation and amortization 173,610 112,713 81,002
Amortization of purchased
technology 438,238 - -
Deferred rent expen se 39,892 10,889 69,630
Write off of patent - 14,000 -
Issuance of common stock for property - - 12,000
and services
Changes in operating assets and
liabilities, net of effects
from acquisitions:
Accounts receivable (149,626) - -
Inventory 18,829 - -
Prepaid expenses and other current 18,536 (41,897) (8,832)
assets
Accounts payable (19,445) (138,572) 187,254
Other accrued liabilities 114,305 233,909 2,618
Net cash flows used in operating
activities (2,148,015) (2,334,683) (1,920,924)
Investing activities
Payment for purchase of inventory in
Business acquisition (82,215) - -
Payment for purchase of acquired
businesses (1,835,356) - -
Short-term investments
724,953 (3,957,538) (828,137)
Purchase of property, equipment and
leasehold improvements (100,770) (193,689) (134,174)
Increase in licenses and patents (37,499) (10,863) (45,455)
Decrease in deposits and other assets 6,197 16,673 22,729
Net cash flows used in investing
activities (1,324,690) (4,145,417) (985,037)
Financing activities
Issuance of common stock, net 976,119 10,415,405 3,150,808
Issuance of mandatorily convertible
notes 7,458,498
Repurchase and retirement of common
stock (1,540,000)
Proceeds from long-term debt - - 267,759
Repayments of long-term debt (99,283) (99,282) (119,129)
Repayments of capital leases (42,622) (17,439) -
Net cash flows provided by financing
activities 6,752,712 10,298,684 3,299,438
Increase in cash and cash equivalents 3,280,007 3,818,584 393,477
Cash and cash equivalents at
beginning of year 5,026,745 1,208,161 814,684
Cash and cash equivalents at end of
year $8,306,752 $5,026,745 $1,208,161
Supplemental disclosures of cash flow
information:
Cash paid for interest 47,953 39,170 28,450
Noncash investing and financing
activities:
Equipment financed under capital leases 234,256 89,549 6,427
Purchased asset obligation $200,000 - -
Common stock issued for business
Acquisitions $1,032,309 - -
</TABLE>
See accompanying notes.
Cypros Pharmaceutical Corporation
Notes to Financial Statements
July 31, 1996
1. Organization and Summary of Significant Accounting Policies
Organization and Business Activity
Cypros Pharmaceutical Corporation (the "Company") was
incorporated in San Diego, California on November 2, 1990. The
Company develops and markets acute-care, hospital-based
products. The Company is currently marketing Glofil and Inulin,
two injectable renal diagnostic products. The Company's pre-
clinical and clinical development programs focus on
cytoprotective drugs designed to reduce ischemia (low blood
flow) induced tissue damage in acute-care settings. The
Company's two clinical programs are currently in six Phase II
trials, which include four for CPC-111 (acute complications of
angioplasty, coronary artery bypass grafting surgery,
congestive heart failure and sickle cell anemia crises), and
two for CPC-211 (stroke and head injury). Through July 31,
1995, the Company was considered to be in the development
stage.
On August 9, 1995, the Company acquired two businesses,
including (i) the New Drug Application for Glofil and finished
goods inventory of Glofil on hand at the time of closing from
Iso-Tex Diagnostics, Inc., a Texas corporation, (the "Glofil
Acquisition") and (ii) the New Drug Application for Inulin and
the raw material and finished goods inventory of Inulin on hand
at the time of closing from Iso-Tex Diagnostics "B", Inc.
("ITDB"), a Texas corporation (the "Inulin Acquisition"). The
Glofil Acquisition was accomplished in an arms' length
negotiation through a purchase of assets and the Inulin
Acquisition was accomplished through a merger of ITDB with and
into the Company (the "Merger"). The total purchase price was
$3,149,880, of which $1,582,215 in cash and 169,231 newly
issued shares of restricted common stock of the Company (the
"Restricted Shares") were paid at closing. The Company used its
working capital to make the cash payments for the acquisitions
at closing. Both acquisitions were accounted for using the
purchase method and, accordingly, the financial statements
include the operations of the businesses from the date of
acquisition.
As part of the Glofil Acquisition, the Company made an
additional cash payment of $200,000 on January 15, 1996 and a
final cash payment of $200,000 on August 9, 1996. As part of
the Inulin Acquisition, the Company has agreed to register the
Restricted Shares, upon the request of the sole stockholder of
ITDB, at any time after one year from the date of closing and
if the registration statement has not become effective within
90 days of the date of the holder's request, the Company is
obligated to repurchase the Restricted Shares at their market
value based upon the closing bid price of the Company's common
stock on such date. [If the holder requests the Company to
Register the Restricted Shares, then the Company intends to and
has the ability to register them within 90 days of such
request.] As a result of the acquisitions of Glofil and
Inulin, the Company commended product sales and is therefore an
operating company.
1. Organization and Summary of Significant Accounting Policies
(continued)
Organization and Business Activity (continued)
The following unaudited pro forma data reflects the combined
results of operations of the Company and the two businesses as
if the acquisitions had occurred on August 1, 1994:
<TABLE>
<CAPTION>
July 31,
<C> <C>
1996 1995
Net revenue $ 1,275,240 $1,031,486
Net loss (3,090,108) (2,993,386)
Net loss per share (0.27) (0.30)
</TABLE>
In January 1996, the Company entered into an agreement with
Syncor International ("Syncor") to distribute Glofil in unit
doses through Syncor's nationwide pharmacies. Under the
agreement, the Company ships whole vials of Glofil on
consignment to selected pharmacies which then repackage them
into unit doses and ship them to customers upon request.
Syncor is also responsible for billing, collections and
disposal of expired unused vials.
Cash, Cash Equivalents and Short-term Investments
The Company considers highly liquid investments with remaining
maturities of three months or less when acquired, primarily
money market funds, to be cash equivalents. Short-term
investments consist of certificates of deposit, U.S. government
securities and investment grade corporate obligations. The
Company has established guidelines relative to diversification
and maturities that maintain safety and liquidity. The Company
has not experienced any losses on its cash equivalents or short-
term investments. Management believes the credit risk
associated with these investments is limited due to the nature
of the investments.
Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such
designations as of each balance sheet date. Debt securities
are classifed as held-to-maturity when the Company has the
positive intent and the ability to hold the securities to
maturity. Heldto-maturity securities are carried at cost,
adjusted for amortization of premiums and accretion of
discounts. Interest,
dividends and amortization on the securities classified as held
to-maturity are included in interest income.
Concentration of Credit Risk
The Company extends credit to its customers, primarily
hospitals and large pharmaceutical companies conducting
clinical research, in connection with its product sales. The
Company has not experienced significant credit losses on its
customer accounts. Two customers individually accounted for 39%
and 15% of current year sales.
1. Organization and Summary of Significant Accounting Policies
(continued)
Inventory
Inventory is stated at the lower of cost (first-in, first-out
method) or market and is comprised of raw materials of $3,437
and finished goods of $59,949.
Depreciation and Amortization
Property and equipment are stated at cost and depreciated
over the estimated useful lives of the assets (generally 5
years) using the straight-line method. Leasehold
improvements are amortized over the lesser of the estimated
useful lives (7 years) or the remaining term of the lease,
whichever is less.
Purchased Technology
Purchased technology associated with the acquisitions of
Glofil and Inulin is stated at cost and amortized on a
straight-line basis over the period estimated to be
benefited (7 years). Effective August 1, 1996, the Company
will adopt Statement of Financial Accounting Standards No.
121 ("FAS 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. The
Company does not believe the adoption of FAS 121 will have a
material effect on the its financial position or results of
operations.
[Deferred Financing Costs
The Company has capitalized banking, legal and accounting
fees associated with the issuance of $8 million in principal
amount of mandatorily convertible notes in 1996. These costs
are amortized to expense over the term of the notes, which
is three years, using the straight-line method commencing at
the closing of the transactions.]
License and Patent Costs
The Company capitalizes certain costs related to license
rights and patent applications. Accumulated costs are
amortized over the estimated economic lives of the license
rights and patents (generally 6 years) using the straight-
line method commencing at the time the license rights are
granted or the patents are issued.
Revenue Recognition
Revenues from product sales of whole vials of Glofil and
Inulin are recognized upon shipment. Revenues from Glofil
sales under the Syncor agreement are recognized upon receipt
by the Company of monthly sales reports from Syncor on unit
dose sales by its pharmacies. The Company is not obligated
to accept returns of products sold that have reached their
expiration date.
Net Loss Per Share
Net loss per share is computed using the weighted average number
of common shares outstanding during the periods.
1. Organization and Summary of Significant Accounting Policies
(continued)
Reclassifications
Certain previously reported amounts have been reclassified to
conform with the 1996 presentation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and disclosures made in the
accompanying notes to the financial statements. Actual results
could differ from those estimates.
Accounting and Disclosure of Stock Based Compensation
Effective August 1, 1996, the Company will adopt Statement of
Financial Accounting Standards No. 123 ("FAS 123"), Accounting
and Disclosure of Stock-Based Compensation. As allowed under FAS
123, the Company will elect to continue to account for stock
option grants in accordance with Accounting Principles Board
Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees and related interpretations. Accordingly, when the
Company grants stock options with an exercise price equal to the
fair market value of the shares on the date of grant, no
compensation expense is recorded. The Company does not believe
the adoption of FAS 123 will have a material effect on its
financial position or results of operations.
2. Financial Statement Details
Short-Term Investments
All short-term investments of the Company are classified as held
to-maturity. The following is a summary of held-to-maturity
investments at amortized cost as of July 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Corporate Debt Securities $ 6,902,848 $ 5,210,665
U.S. Government Obligations 749,780 2,778,223
Certificates of Deposit 37,669 426,362
$ 7,690,297 $ 8,415,250
</TABLE>
As of July 31, 1996, the difference between cost and estimated
fair value of the held-to-maturity investments was not
significant. Of the above-referenced 1996 investments,
$6,715,067 will mature at various dates through July 31, 1997 and
$975,230 will mature at various dates after July 31, 1997 through
July 31, 1998.
2. Financial Statement Details (continued)
Property, Equipment and Leasehold Improvements
<TABLE>
<CAPTION>
Property, equipment and leasehold improvements consist of
the following as of July 31:
1996 1995
<S> <C> <C>
Laboratory equipment $ 570,865 $337,622
Office equipment, furniture and fixtures 224,932 124,553
Leasehold improvements 89,517 88,113
885,314 550,288
Less accumulated depreciation and (277,108) (138,637)
amortization
$ 608,206 $ 411,651
</TABLE>
Depreciation expense was $138,471, $83,313 and $44,252 for the
years ended July 31, 1996, 1995 and 1994, respectively.
Other Accrued Liabilities
At July 31, 1996 and 1995, other accrued liabilities consist
primarily of clinical costs related to the Phase II clinical
trials of CPC-111.
3. Long-Term Debt
As of July 31, 1996, the Company had an installment note payable
to a financial institution of $140,649, of which $99,282 was
classified as current. The outstanding balance was
collateralized by $242,000 of the Company's short-term
investments as of July 31, 1996. The installment note bears
interest at the prime rate plus 1.6% (or 9.85% at July 31, 1996)
and is being repaid in monthly installments through December
1997. Interest expense incurred on the installment note was
$19,897, $29,947 and $25,971 for the years ended July 31, 1996,
1995 and 1994, respectively.
4. Commitments
Leases
The Company leases its office and research facilities under
operating lease agreements and certain equipment under capital
lease agreements. A security deposit of $85,714 under one of the
facilities lease agreements is included in deposits and other
assets.
4. Commitments (continued)
Leases (continued)
<TABLE>
<CAPTION>
Minimum future obligations under both
operating and capital leases as of July 31,
1996 are as follows:
<C> <C> <C>
Operating Capital
Leases Leases
1997 $ 355,780 $111,236
1998 378,040 106,832
1999 397,550 70,134
2000 421,561 35,231
2001 310,573 -
Thereafter 102,749
- -
$1,966,253 $323,433
Less amounts representing interest 55,133
Present value of net minimum lease payments 268,300
Current portion of obligations under
capital leases 81,035
Long-term obligations under capital leases 187,265
</TABLE>
Rent expense totaled $193,880, $107,952 and $80,127 for the
years ended July 31, 1996, 1995 and 1994, respectively.
Equipment acquired under capital leases totaled $277,669 and
$82,614 (net of accumulated amortization of $52,564 and $13,362)
as of July 31, 1996 and 1995, respectively.
[Mandatorily Convertible Notes
During the year ended July 31, 1996, the Company issued $8
million in principal amount of non-interest bearing, mandatorily
convertible notes to institutional investors in private
placements under the provisions of the Securities and Exchange
Commission ("SEC") Regulation D. The notes are convertible at
the option of the investors into shares of the Company's Common
Stock at various dates from January 31, 1997 through July 31,
1999 at a discount to the market price of the stock immediately
preceding conversion, ranging from 15% to 25%, with the actual
discount depending on the length of time each investor has held
the note being converted. The notes must be converted at various
dates through July 31, 1999. The Company is required to register
with the SEC the shares of Common Stock issuable upon conversion
of the notes on or prior to the expiration of the allowable
conversion periods. The notes were originally classified
as a component of shareholders' equity for several reasons,
including the fact that they are non-interest-bearing and
convertible only into Common Stock of the Company, absent
unusual circumstances. However, on August 26, 1997, in
conjunction with an SEC review of a registration statement
filed by the Company and in consideration of certain positions
formally adopted by the SEC in March 1997, the Company
reclassified the notes to long-term debt. The notes are recorded
net of the $1,582,935 discount available upon conversion
(assuming full conversion at the earliest possible date(s),
and the discount represents an effective interest rate of 33%.
The discount has been added to Common Stock and will be amortized
to expense in fiscal 1997.]
[License Agreements
The Company has licenses to various patents for CPC-111 and CPC
211, its two clinical development programs, for the remaining
term of the patents. The license agreements require payments of
cash, warrants or the issuance of stock options to the licensors
upon the accomplishment of various development milestones and the
payment of royalties to the licensors upon the commercial sale of
products incorporating the licensed compound. Under the
agreement for CPC-211, the Company issued a warrant to the
licensor in fiscal 1995 exercisable into 43,750 shares of the
Company's Common Stock at an exercise price of $1.60 per
share, as a result of the completion of the Phase I trials
of that compound. The only remaining significant development
milestone under these agreements is the requirement that the
Company pay the licensor of CPC-111 $250,000 upon the filing
of a New Drug Application with the Food and Drug
Administration (the "FDA") for the approval to market that
compound. In the event milestone or royalty payments to the
licensor of CPC-111 are not made by the Company within
specified time periods, that licensor may elect to terminate
the license agreement and all rights thereunder. Such a
termination could have a significant adverse impact upon the
Company.]
5. Shareholders' Equity
Preferred Stock
The Company has authorized 1,000,000 shares of
convertible preferred stock. As of July 31, 1996, no such
shares were issued or outstanding.
5. Shareholders' Equity (continued)
Common Stock
During the year ended July 31, 1996, the Company purchased
and retired 280,000 shares of its outstanding Common Stock at
$5.50 per share in a privately negotiated transaction.
*
Warrants
In connection with the Company's initial public offering in
1992 (the "Offering"), the Company issued 2,875,000 Redeemable
Class A and Class B Warrants. During fiscal years 1994 and
1995, the Company initiated special programs designed to
encourage holders of Redeemable Class A Warrants to
exercise their warrants immediately (the "Special Class A
Warrant Programs"). Under the Special Class A Warrant
Programs, the Company received net proceeds of $10,497,005
from the exercise of 2,847,037 Redeemable Class A Warrants and
the concurrent issuance of 3,345,236 shares of Common Stock and
1,423,512 Redeemable Class B Warrants.
Subsequent to the end of the Special Class A Warrant
Programs, the Company issued a notice of mandatory
redemption to the remaining holders of Class A Warrants.
The holders of 20,250 Class A Warrants exercised their
warrants upon their original terms, resulting in $63,787
proceeds to the Company and the issuance of 20,250
shares of Common Stock. The Company repurchased all of
the unexercised Class A Warrants outstanding at the end of
the 30-day mandatory redemption period for $0.02 per warrant.
As of July 31, 1996, there were no Redeemable Class A Warrants
outstanding.
During the course of the Special Class A Warrant Programs, all
of the 250,000 Unit Purchase Options issued to the
underwriter of the Offering were exercised at $3.02 per
option, and the 250,000 Redeemable Class A Warrants within
such units were immediately exercised resulting in aggregate
net proceeds of $1,681,266 and the concurrent issuance of
543,745 shares of Common Stock and 375,000 Redeemable Class B
Warrants.
5. Shareholders' Equity (continued)
Warrants (continued)
The Company issued an additional warrant in 1995 exercisable
into 312,500 shares of the Company's Common Stock at a purchase
price of $5 per share to a firm as consideration for financial
advisory services. In January 1996, the Company cancelled the
warrant and issued 200,000 shares of Common Stock at $3.39 in
lieu of the cancelled warrant.
As of July 31, 1996, 4,673,512 Redeemable Class B Warrants
were outstanding. Warrant holders are entitled to purchase one
share of Common Stock at $5.50 per share for each
warrant until November 3, 1997. The Company is entitled to
redeem the warrants on not less than than 30 days written
notice at $0.02 per warrant when the average closing bid
price of the Common Stock exceeds $9.60 per share over a
period of 20 consecutive trading days, ending within 15 days
of the date of notice of redemption.
Stock Option Plans
As of July 31, 1996, 2,274,038 shares of Common Stock
were reserved for issuance under the 1992 Stock Option Plan
(the "1992 Plan"). The 1992 Plan provides for the grant of
incentive and nonstatutory stock options with various
vesting periods, generally four years, to employees,
directors and consultants. The exercise price of incentive
stock options must equal at least the fair market value on
the date of grant, and the exercise price of nonstatutory
stock options may be no less than 85% of the fair market
value on the date of grant. The maximum term of options
granted under the Plan is ten years.
In June 1993, the Company adopted the 1993 Non-
Employee Directors' Stock Option Plan (the "1993 Plan"), under
which 250,000 shares of Common Stock were reserved for
issuance. The 1993 Plan provides for the granting of 25,000
options to purchase Common Stock upon appointment as a non-
employee director and an additional 3,000 options each
January thereafter, beginning January 1, 1994. Options
vest over four years. The exercise price of the options is
85% of the fair market value on the date of grant.
5. Shareholders' Equity (continued)
Stock Option Plans (continued)
<TABLE>
<CAPTION>
The following table summarizes stock option activity
under the 1992 and 1993 Plans:
Options Exercise Price
Outstanding per Share
<S> <C> <C>
Balance at July 31, 661,750 $1.44 - $4.05
1993
Granted 358,125 $3.06 - $4.70
Exercised (32,650) $1.44 - $2.90
Canceled (40,600) $1.58 - $2.90
Balance at July 31, 946,625 $1.44 - $4.70
1994
Granted 292,500 $4.25 - $6.40
Exercised (183,312) $1.44 - $4.60
Canceled (37,813) $3.87 - $4.60
Balance at July 31, 1,018,000 $1.44 - $6.40
1995
Granted 360,000 $3.08 - $8.50
Exercised (10,000) $3.44 - $4.60
Canceled (12,188) $5.40
Balance at July 31, 1,355,812 $1.44 - $8.50
1996
</TABLE>
At July 31, 1996, options to purchase 789,011 shares of Common
Stock were exercisable and there were 1,168,226 shares available
for grant under the Plans.
Deferred Compensation
The Company has recorded deferred compensation for the difference
between the price of certain stock sold and options granted and
the fair value of the Company's Common Stock. Deferred
compensation is amortized to expense during the vesting period of
the related stock or options.
6. Income Taxes
The Company accounts for income taxes using the liability method
under Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes. Deferred income taxes reflect the
net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
6. Income Taxes (continued)
<TABLE>
<CAPTION>
Significant components of the Company's deferred tax assets and
liabilities as of July 31, 1996 and 1995 are as follows:
1996 1995
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $3,358,000 $ 2,366,000
Capitalized research and
development costs 404,000 264,000
Research and development tax
credit carryforwards 378,000 355,000
Other 231,000 168,000
Total deferred tax assets 4,371,000 3,153,000
Deferred tax liabilities:
Other (19,000) (16,000)
4,352,000 3,137,000
Valuation allowance (4,352,000) (3,137,000)
Net deferred tax assets $ - $ -
</TABLE>
As of July 31, 1996, the Company has federal and California tax
net operating loss carryforwards of approximately $9,305,000 and
$1,676,000, respectively. The federal and California tax loss
carryforwards will begin expiring in 2007 and 1997, respectively,
unless previously utilized. The Company also has federal and
California research and development tax credit carryforwards of
$288,000 and $138,000, respectively, which will begin expiring in
2007 unless previously utilized. The above carryforwards were
determined as if the Company were filing a tax return at July 31,
1996; however, for tax return purposes the Company uses a
calendar year end.
Use of the Company's net operating loss and credit carryforwards
will be limited because of the Offering which resulted in a
cumulative change in ownership of more than 50%. However, the
Company does not believe such change will have a material impact
upon the Company's ability to utilize these carryforwards.
The valuation allowance increased $1,215,000 from July 31, 1995
to July 31, 1996 due principally to the increase in deferred tax
assets resulting from the increase in tax net operating loss
carryforwards. Realization of deferred tax assets is dependent
on future earnings, the timing and amount of which will be
dependent on scientific success, results of clinical trials and
regulatory approval of the Company's products currently under
development. Accordingly, the full valuation reserve has been
established to
