RNS Number:5285S
Napo Pharmaceuticals Inc
17 April 2008
For immediate release 17 April 2008
Napo Pharmaceuticals, Inc
("Napo" or "the Company")
RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007
South San Francisco; 17 April 2008 - Napo Pharmaceuticals, Inc. (LSE: NAPL and
NAPU) announces today its results for the year ended 31 December 2007.
Financial Highlights:
*Net loss attributable to common shareholders was US$26.2 million,
inclusive of US$4.1 million of in-process R&D associated with the
acquisition of IndUS Pharmaceuticals, Inc. and US$1.9 million of non-cash
stock based compensation
*Cash and cash equivalents and short-term investments of US$7.2 million at
31 December 2007
*Approximately US$11.1 million (gross) raised through the issuance of
common stock (US$9.6 million) and convertible notes (US$1.5 million)
Napo has received a "going concern" opinion from its US auditors, BDO Seidman
LLP. The opinion states that the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern.
Management have plans to raise additional funds, which include: the out-license
of certain rights to crofelemer including the indications of CRO-HIV, CRO-IBS,
CRO-ID and CRO-PED in the United States and other western territories; as well
as certain rights to NP-500, in exchange for a licensing fee(s). Such licensing
fees may need to be supplemented with debt or equity issuances in order for Napo
to have sufficient funds to complete the CRO-HIV Phase 3 clinical trial. If Napo
is unable to attract such funding through a combination of licensing fees and
equity or debt issuances, it may be forced to curtail sharply its operations
including discontinuing the CRO-HIV trial.
Operational Highlights
*Commencement of pivotal Phase 3 CRO-HIV trial, which, subject to further
funding, is now expected to complete in the first half of 2009.
*Strengthened intellectual property position
*Notice of allowance in 2007 (issued in 2008) patent for "enteric
formulations of proanthocyanidin polymer anti-diarrhoeal compositions"
which expires in 2017
*Additions to Napo's pre-clinical and clinical pipeline, including:
*in-license of a use patent and regulatory package for NP-500, a
compound for the indication of insulin resistance and metabolic disease.
*in-license of certain patents and technology relating to CFTR (cystic
fibrosis transmembrane conductance regulator) inhibitors. The CFTR
inhibitors have a mechanism of action similar to that of crofelemer
which Napo and its partners are developing for indications including,
diarrhoea associated with HIV/AIDS, infectious diarrhoea and paediatric
diarrhoea.
*acquisition of IndUS Pharmaceuticals, Inc. ("IndUS") through the
issuance of US$4.1 million of Napo common stock. IndUS is focused on the
discovery and development of new NCEs from natural sources, based on
Ayurvedic practice, with therapeutic activity in cancer, diabetes and
infectious diseases. IndUS has 5 issued US patents in the oncology area.
*Appointment of Dr. Pravin Chaturvedi as Napo's President and Chief
Scientific Officer
Post Period End Highlights
*US$2.5 million raised through issuance of convertible debt and equity in
March 2008
*Statistically significant Phase 2a trial for CRO-ID (crofelemer for the
treatment of acute adult infectious diarrhoea) conducted by Napo's partner,
Glenmark Pharmaceuticals Limited. The results were based on an observed case
analysis. Further analysis is ongoing, as per the protocol and ITT analysis
will be published as and when it is available.
CRO-HIV Trial
The CRO-HIV ADVENT trial is a multicenter US trial and enrolment into the trial
is directed towards showing clinical benefit of the drug in the patients who
have consistent significant watery diarrhoea, which is a subset of the larger
number of HIV patients who meet the criteria of having chronic diarrhoea. The
Company adopted this strict requirement of the study protocol to minimise the
variability in the study results and increase the power of the study. Since
commencement of enrolment, over 200 patients have presented with chronic
diarrhoea for evaluation for study participation, however, less than 50% have
met the strict criteria for watery diarrhoea for study enrolment. Accordingly,
Napo now anticipates that the Stage I interim results will be available from the
CRO-HIV trial in the second half of this year and that the final results and a
NDA filing will occur in the first half of 2009; this is subject to further
funding.
Lisa A. Conte, CEO of Napo Pharmaceuticals, Inc. commented: "We are pleased with
what Napo was able to accomplish in 2007. We commenced the pivotal Phase 3 trial
for CRO-HIV; we increased our pipeline through in-licensing activities;
significantly strengthened our management team through the addition of Dr.
Pravin Chaturvedi as President and CSO, and we recently announced successful
results from Glenmark's Phase 2a trial for CRO-ID. Subject to further funding,
we look forward to a successful conclusion of the Phase 2 cholera trial in Q2
2008 and our CRO-HIV Phase 3 trial in the first half of 2009. Napo is
investigating the regulatory pathway to file a NDA for treatment of acute
infectious diarrhoea (CRO-ID) with crofelemer coincident with its on-going Phase
3 program in chronic diarrhoea in people living with HIV/AIDS (CRO-HIV). We
believe that the positive results of the Phase 2a CRO-ID trial coupled with the
regulatory pathway for CRO-ID/CRO-HIV will be attractive to a partner."
For more information please contact:
Napo Pharmaceuticals, Inc.
Lisa Conte, Chief Executive Officer
(001) + 650 616 1902
Charles Thompson, Chief Financial Officer
(001) + 650 616 1903
Buchanan Communications
(44) + 020 7466 5000
Tim Anderson, Mary-Jane Johnson
About Napo Pharmaceuticals, Inc.
Napo Pharmaceuticals, Inc. focuses on the development and commercialisation of
proprietary pharmaceuticals for the global marketplace in collaboration with
local partners. Napo was founded in November 2001, and is based in California,
USA with a subsidiary in Mumbai, India.
Napo's late-stage proprietary gastro-intestinal compound, crofelemer, is in
various stages of clinical development for four distinct product indications,
including a late-stage Phase 3 program:
CRO-HIV for AIDS diarrhoea, Phase 3
CRO-IBS for diarrhoea irritable bowel syndrome ("D-IBS"), Phase 2
CRO-ID for acute infectious diarrhoea (including cholera), Phase 2
CRO-PED for paediatric diarrhoea, Phase 1
The FDA has granted fast-track status to CRO-IBS and CRO-HIV.
CRO-HIV is being evaluated in a randomised, double-blind, parallel-group,
placebo-controlled, two-stage, adaptive design study to assess the efficacy and
safety of crofelemer at 125mg, 250 mg, and 500 mg oral doses twice daily ("po
BID") for the treatment of chronic diarrhoea in people living with HIV/AIDS (the
"ADVENT" trial). The ADVENT trial will be executed in two stages. Stage I
represents a dose selection stage and Stage II a dose assessment stage. Four
dose groups (placebo, 125 mg, 250 mg, and 500 mg) are being assessed in Stage I.
When approximately 50 subjects per group complete the initial efficacy dosing
period (28 days), an interim analysis will be conducted to select an optimal
single dose of crofelemer for Stage II. Stage II will continue until an
additional 75 subjects are randomised both to this dose of crofelemer and the
placebo, providing for 125 patients on placebo and 125 patients the selected
crofelemer dose.
Crofelemer, a proprietary patented agent, is extracted from Croton lechleri, a
medicinal plant which can be sustainably harvested from several countries in
South America. Napo also plans to develop an early clinical stage product, NP-
500, for the treatment of insulin resistant diseases of Type 2 diabetes and
metabolic syndrome (Syndrome X; pre-diabetic syndrome). Napo also has a plant
library of approximately 2,300 medicinal plants from tropical regions, and Napo
has entered two screening relationships associated with this collection.
Currently, products are based on the chemical and biological diversity derived
from plants with medicinal properties, but future products may be in-licensed
from other sources.
Napo has partnerships with Glenmark Pharmaceuticals Limited of India and
AsiaPharm Group Ltd. of China. For more information please visit
www.napopharma.com.
Disclaimer The Shares referenced in this announcement are not for distribution,
directly or indirectly, in or into the United States or to any US person as
defined in Regulation S under the US Securities Act of 1933, as amended
("Regulation S"). This announcement is not an offer of securities for sale into
the United States or elsewhere. The Shares described above have not been
registered under the US Securities Act of 1933, as amended (the "Securities
Act") and may not be offered or sold in the United States or to, or for the
account or benefit of, US persons (as such term is defined in Regulation S)
unless they are registered under the Securities Act or they are exempt from
registration under the Securities Act. No offer or sale of Regulation S
securities has been made or will be made in the United States. Hedging
transactions involving these securities may not be conducted unless in
compliance with the Securities Act.
This release contains certain statements, statistics and projections that are or
may be forward-looking. These statements are based on the current expectations
or beliefs of Napo's. management and are subject to a number of factors and
uncertainties (including the "Risk Factors" identified in Napo's Prospectus
issued on 28 September 2007) and the outcome of these events may differ
materially from those described in the forward-looking statements. The accuracy
and completeness of all such statements, including, without limitation,
statements regarding the future financial position, strategy, projected costs,
plans and objectives for the management of future operations of Napo and its
subsidiaries is not warranted or guaranteed. These statements typically contain
words such as "intends", "expects", "anticipates", "estimates" and words of
similar import. By their nature, forward looking statements involve risk and
uncertainty because they relate to events and depend on circumstances that will
occur in the future. Although Napo believes that the expectations reflected in
such statements are reasonable, no assurance can be given that such expectations
will prove to be correct. There are a number of factors, which may be beyond the
control of Napo, which could cause actual results and developments to differ
materially from those expressed or implied by such forward-looking statements.
Other than as required by applicable law or the applicable rules of any exchange
on which our securities may be listed, Napo has no intention or obligation to
update forward-looking statements contained herein. You should not place undue
reliance on forward looking statements, which speak only as at the date of this
announcement.
Chairman and Chief Executive's Statement
Napo had several milestones that the Company hoped to achieve in 2007. Below is
a summary of the intended milestones and a brief comment on the current status.
*Launch of the CRO-HIV pivotal Phase 3 trial:
o Napo initiated patient enrolment for the pivotal, Phase 3 CRO-
HIV trial in 2007. This trial is currently on-going and the Company now
anticipates, subject to further funding, the Stage I interim results will be
available from the CRO-HIV trial in the second half of this year and that the
final results and a NDA filing will occur in the first half of 2009.
*Completion of the CRO-ID Phase 2 Cholera Trial
o This trial is ongoing. Napo is testing lower doses and different
formulations in the continuation of the cholera trial (See May 21, 2007 press
release - "Ethics Committee Approval Granted for Multiple-Dose Continuation of
Phase 2 Clinical Trial of Crofelemer for Treatment of Secretory Diarrhoea
Associated with Cholera Infection"). Napo anticipates results from the trial in
Q2 2008.
*Clinical progress of CRO-IBS Phase 2b trial (conducted by Napo's former
licensee - Trine Pharmaceuticals Inc ("Trine")
o On 11 February 2008 Napo announced Trine's disclosure to Napo of
Trine's review of preliminary data of the Phase 2b study conducted by Trine for
the treatment of diarrhoea-predominant irritable bowel syndrome ("D-IBS") with
crofelemer ("CRO-IBS"). Napo was informed by Trine that they have determined
that: i) the primary clinical endpoint of pain was not achieved; and ii) that
there were no drug related adverse events. Napo and Trine have mutually
terminated the license of crofelemer to Trine (See "Partners" for more
information.). The Company recently received the data package from the trial and
is evaluating the data.
*Development and planning for NP-500 for insulin resistance and metabolic
disease
o Napo has designed the outline of a Phase 2 trial for NP-500 which
will commence upon the selection of a development partner and appropriate
regulatory submissions. In February 2007, Napo entered into an agreement for the
in-license of a use patent and regulatory and other information regarding NP-
500. The license will allow Napo to have access to the regulatory package filed
with the United States Federal Drug Administration, and to access technology
protected by a use patent in the United States.
*Clinical progress of Glenmark's acute infectious diarrhoea indication
o Glenmark initiated a Phase 2a trial for CRO-ID at the end of
November 2007, the positive results of which were announced on 10 April 2008.
The results were based on an observed case analysis. Further analysis is
ongoing, as per the protocol and ITT analysis will be published as and when it
is available.
*IP Development
o In late 2007, a notice of allowance was posted on the United
States Patent Office web site for Napo's patent application "enteric
formulations of proanthocyanidin polymer antidiarrhoeal compositions". This
patent was later issued in early 2008. This patent, in conjunction with Napo's
existing IP, the CFTR technology licensed from UCSF plus the recently licensed
patent from the University of Iowa regarding secretory diarrhoea strengthens our
IP position with regard to crofelemer's mechanism of action.
o Napo reached agreement with the University of Iowa Research
Foundation to obtain the non exclusive, royalty free license of United States
Patent No. 5,234,922, and titled Use of Sulfonylureas and Other Potassium
Channel Regulators to Treat Secretory Diarrhoea, and in the inventions described
and claimed therein.
o With the acquisition of IndUS, the Company acquired the exclusive
worldwide rights to novel PBD compounds for the treatment of various types of
cancers. Five US patents covering several preclinical candidates in the cancer
portfolio of Napo Pharmaceuticals (US Patent Nos. 6,362,331, 6,800,622,
6,683,073, 6,884,799 and 7,015,215) have been issued. The Directors believe that
the strength of the issued patents in the US and Patent Co-Operation Treaty
countries together with the associated intellectual property estate around these
compounds provides a significant intellectual property position for the Company
across this class of compounds, which may provide the basis for the global
commercialisation success of these potential new anticancer drugs. The Company
also acquired several plant extracts with preclinical activity in the fields of
diabetes and infectious diseases.
* Plans/partnering for western territory paediatric development
*With the termination of the license agreement with Trine, Napo is in
discussions with potential partners to license crofelemer in western
markets across all its indications.
* Progress on the development of a lower cost manufacturing process for
crofelemer
*Our manufacturing partner is working on process improvements for
crofelemer that will reduce the cost of manufacturing active
pharmaceutical ingredient ("API"). It is anticipated that such
improvements will begin to be utilised in the early years of commercial
manufacturing.
* Pre-clinical pipeline development
*We are pleased to have accomplished this goal through:
- in-licensing a regulatory package and a use patent covering
NP-500 - for insulin resistance and metabolic disease;
- in-licensing of CFTR technology (similar mechanism of action
to crofelemer) from the University of California; and
- the acquisition of IndUS and its pre clinical indications in
oncology, infectious disease and diabetes.
The Acquisition of IndUS Pharmaceuticals
In October the Company acquired IndUS Pharmaceuticals, Inc. based in the Boston
area, Massachusetts and with operations in Hyderabad and Coimbatore, India.
IndUS is focused on the discovery and development of new NCEs from natural
sources based on Ayurvedic practice with therapeutic activity in cancer,
diabetes and infectious diseases. IndUS Pharmaceuticals has a portfolio of
several novel pyrrolo (2,1-c)(1,4) benzodiazepine (PBD) dimers that show
sequence selective DNA minor-groove binding and display potent in vitro
antitumor activity. IndUS has 5 issued US patents on these compounds and some
have corresponding foreign patent applications. Furthermore, IndUS has a library
of plant extracts demonstrating preclinical activity in the diabetes and
infectious disease areas. The CEO of IndUS, Dr. Pravin Chaturvedi became Napo's
President and Chief Scientific Officer and has been a tremendous addition to
Napo.
Crofelemer IP Rights and Strategy
The Company now retains all rights to crofelemer in North America, Japan and
Western Europe under its intellectual property as a result of the mutual
termination of the license agreement with Trine. In early 2008, Napo and Trine
mutually agreed to terminate their license agreement for crofelemer after Napo
was notified that Trine's review of preliminary data for the Phase 2b trial for
crofelemer for a diarrhoea predominant irritable bowel syndrome ("D-IBS") did
not meet its endpoint for pain. With the termination of the agreement with
Trine, Napo is conducting further analysis of the clinical data from the D-IBS
study.
The Directors believe that the retention of all rights to crofelemer provides an
opportunity for new licensing activity around crofelemer, not only for CRO-HIV
and CRO-IBS, but for the range of indications including CRO-ID. Accordingly,
Napo is in discussions with several parties regarding the potential licensing
and partnering of this important asset.
Board changes
On 20 April 2007, Sir William Young, Chairman and Dr. Gregory Stock joined Jack
Van Hulst on the board of directors of Napo. On 12 June 2007, Thomas Van Dyck
joined the board of directors. Four Non-executive Directors resigned on 20 April
2007.
Napo's goals for 2008:
Whilst we recognise that the Company requires further funds to continue its
operations, and we are committed to raising these funds either through licensing
fees and/or equity or debt issuance, we have set the following goals for 2008:
*Completion of Stage I of the CRO-HIV trial
*Initiation of Glenmark's CRO-ID trial Phase 2b trial
*Announce data from the cholera trial
*Out-license of western rights to crofelemer across its various
indications
*Anticipated partnering and clinical development of NP-500
Thank you for your support. We would also like to thank our Non-executive
Directors for their tremendous input and support of Napo.
Sir William Young Lisa A. Conte
Chairman of the Board CEO
Finance Review
Summary of Results of Operations:
Years Ended 31 December
2005 2006 2007
Revenue 8,973 1,238,444 303,297
Operating expenses:
Cost of revenue: 37
General & administrative (2) 2,090,909 4,361,064 7,052,738
Research & development (1) 1,297,076 7,469,626 19,495,072
Total operating expenses 3,388,022 11,830,690 26,547,810
Loss from operations (3,379,049) (10,592,246) (26,244,513)
Other income, net 65,200 181,165 32,481
Interest (expense.) income, (22,758) 340,447 685,388
net
Net loss (3,336,607) (10,070,634) (25,526,644)
Deemed dividends (3,942,007) (637,500)
Net loss attributable to
common shareholders (3,336,607) (14,012,641) (26,164,144)
Non-cash stock based
compensation expense
included in operating
expenses:
Research & development (1) 15,762 767,437 1,746,332
General & administrative (2) 31,949 239,559 197,578
Basic and diluted net loss
per common share US$ ($82.42) ($0.83) ($0.59)
Basic and diluted net loss
per common share (pounds) (�42.09) (�0.41) (�0.29)
Shares used in basic and 40,484 16,925,408 44,451,285
diluted net loss per common
share calculation
Comparison of Years Ended 31 December 2007 and 2006
Revenue. Revenue in the year ended 31 December 2007 was attributable to contract
revenue of approximately US$300,000 from a grant from the National Institutes of
Health - National Institute of Allergy and Infectious Diseases associated with
the development of a formulation of crofelemer for cholera; as compared to
US$1.2 million in the year ended 31 December 2006. The majority of revenue in
2006 was the result of a US$1 million milestone payment from Trine, which in
2004 licensed crofelemer for the indication of diarrhoea-predominant IBS
(CRO-IBS) worldwide. The milestone payment was associated with Trine's
initiation of a Phase 2b trial for CRO-IBS. Additionally, Napo received contract
revenue of US$238,000 associated with the development of a formulation of
crofelemer for cholera.
General and Administrative Expenses. General and administrative expenses were
US$7.1 million in the year ended 31 December 2007 compared to US$4.4 million in
the year ended 31 December 2006. In 2007, corporate legal costs were
approximately $1.7 million, an increase of approximately US$1.1 million from
approximately US$600,000 in 2006. The increase in corporate legal expenses was
related to the full year effect of a public listing of Napo common stock,
changes in Napo's board of directors, acquisition costs related to the merger
with IndUS and in-licensing activity associated with NP-500 and the CFTR
technology licensed from the University of California - San Francisco and other
general legal costs. Patent costs also increased substantially in 2007 to
approximately US$400,000 from US$100,000 in 2006 related to the development of
new intellectual property. Other increases in 2007 in general and administrative
expenses included increased salary costs of approximately $400,000; higher
travel costs which increased approximately US$71,000; plus higher charges
related to employee benefits of approximately US$123,000, both as a result of
increased company headcount and higher charges for insurance for health and life
coverage. Other general and administrative expenses including communications,
rent, professional services as well as other expense items, collectively
increased approximately $400,000. Included in general and administrative
expenses were non-cash compensation charges of approximately US$198,000
associated with the grant of incentive equity options compared to approximately
$240,000 in the year ended 31 December 2006
Research and Development. Research and development expenses were US$19.5 million
in the year ended 31 December 2007 compared to US$7.5 million in the year ended
31 December 2006. The increase in research and development expenses is
attributable to the preparation for and initiation of the CRO-HIV trial as well
as US$4.1 million in-process research and development costs related to the
acquisition of IndUS. The trial related expenses include costs related to
pharmaceutical manufacturing, formulation, packaging and third party contractors
and consultants involved with administering the trial. Excluding personnel and
compensation expenses, expenses for the CRO-HIV trial increased to approximately
US$7.0 million in 2007 from approximately US$2.5 million in 2006. In 2007 there
were personnel additions in the areas of clinical development, formulation,
quality-control and manufacturing. Overall, salary compensation for research and
development personnel increased approximately $2.0 million in 2007. There were
sixteen research and development personnel at the end of 2007 compared to
thirteen at the end of 2006. Included in research and development expenses were
approximately US$1.7 million of non-cash charges associated with the grant of
incentive equity options compared to US$767,000 in 2006.
Other income, net. Other income in the year ended 31 December 2007 was US$32,000
compared to US$181,000 in the year ended 31 December 2006. Other income in 2006
included a gain on a settlement with a third party regarding damages to property
held in storage of US$172,000.
Net Interest. Net interest income in the year ended 31 December 2007 was
US$685,000 compared to net interest income of US$340,000 in the year ended 31
December 2006 The interest income in 2007 was due to higher net cash balances
for a full year compared to the year ended 31 December 2006.
Deemed dividends. In the year ended 31 December 2007, Napo incurred non-cash
charges of US$638,000 associated with deemed dividends on Optionally Convertible
Preferred Shares held by an investor in India. In 2006, Napo incurred non-cash
charges of approximately US$3.9 million associated with the issuance of Series C
Convertible Preferred Stock in the months prior to Napo's initial public
offering.
Net loss attributable to common stockholders. The net loss attributable to
common stockholders in the year ended 31 December 2007 was US$26.2 million
compared to US$14.0 million at 31 December 2006 reflecting significant increases
in research and development activity related to the CRO-HIV trial, the write-off
of in-process R&D related to the acquisition of IndUS in October 2007 and higher
levels of general and administrative expenses associated with increased
operating activities and non cash compensation charges and deemed dividends.
Comparison of Years Ended 31 December 2006 and 2005
Revenue. Revenue in the year ended 31 December 2006 was approximately US$1.2
million as compared to US$9,000 in the year ended 31 December 2005. In 2006,
Napo received a US$1 million milestone payment from Trine, which in 2004
licensed crofelemer for the indication of diarrhoea-predominant IBS (CRO-IBS)
worldwide. The milestone payment was associated with Trine's initiation of a
Phase 2b trial for CRO-IBS. Additionally, Napo received a contract revenue of
approximately US$244,000 from a grant from the National Institutes of Health -
National Institute of Allergy and Infectious Diseases associated with the
development of a formulation of crofelemer for cholera. Milestone and contract
revenue of approximately US$1,244,000 was partially offset by the write off of
another revenue item which reduced total revenue to approximately US$1,238,000.
General and Administrative Expenses. General and administrative expenses were
approximately US$4.4 million in the year ended 31 December 2006 compared to
US$2.1 million in the year ended 31 December 2005. General and administrative
expenses increased in the year ended 31 December 2006 as a result of higher
employee headcount and higher compensation, employee recruiting activities as
well as increased costs associated with Napo's public offering including travel,
public relations and other legal costs. Included in general and administrative
expenses were non-cash compensation charges of US$240,000 associated with the
grant of incentive equity options compared to $32,000 in the year ended 31
December 2005.
Research and Development. Research and development expenses were approximately
US$7.5 million in the year ended 31 December 2006 compared to US$1.3 million in
the year ended 31 December 2005. Research and development expenses increased
significantly in 2006 with the addition of additional employees and consultants
in the areas of manufacturing and clinical development in preparation for the
pivotal Phase 3 trial for CRO-HIV and the cholera trial which began in March
2006. In addition to personnel, there were higher costs associated with
preparations for the manufacture of active pharmaceutical ingredient,
formulation and related activities. Research and development employees increased
to thirteen at the end of 2006 from four at the end of 2005. Included in
research and development expenses were non-cash compensation charges of
US$767,000 associated with the grant of incentive equity options compared to
US$16,000 in the year ended 31 December 2005.
Other income, net. Other income in the year ended 31 December 2006 was
approximately US$181,000 compared to US$65,200 in the year ended 31 December
2005. Other income in 2006 included a gain on a settlement with a third party
regarding damages to property held in storage of US$172,000, while the other
income item of US$65,000 in the year ended 31 December 2005 was due to an
insurance recovery on damaged property.
Net Interest. Net interest income in the year ended 31 December 2006 was
approximately US$340,000 compared to net interest expense of US$23,000 in the
year ended 31 December 2005. The interest income in 2006 was due to higher net
cash balances while the net interest expense in the year ended 31 December 2005
was associated with interest expense on US$1.1 million series C convertible
notes which converted to Series C Preferred Shares in July 2005.
Deemed dividends. In the year ended 31 December 2006, Napo incurred non-cash
charges of approximately US$3.9 million associated with the issuance of Series C
Convertible Preferred Stock in the months prior to Napo's initial public
offering.
Net loss attributable to common stockholders. The net loss attributable to
common stockholders in the year ended 31 December 2006 was approximately US$14.0
million compared to US$3.3 million in the year ended 31 December 2005,
reflecting significant increases in research and development activity and higher
levels of general and administrative expenses associated with increased
operating activities and as well as Napo's initial public offering and non cash
compensation charges and deemed dividends.
Cash Flow and Liquidity
For the years ended 31 December 2007 and 2006, cash used in operating activities
was US$18.4 million US$7.2 million, respectively, and cash used to purchase
property and equipment was US$389,000 and US$481,000.
Net cash provided by sales of investments, offset by investment purchases was
US$13.2 million in 2007. Additionally US$1.4 million was used to license a
regulatory package for NP-500, for insulin resistance and metabolic disease. In
2006 net purchases of investments were US$18.8 million.
Net cash provided by financing activities was US$7.6 million in 2007 and US$26.2
million in 2006.
Financing activities in 2007 included:
In December 2006 and January 2007, Napo issued 3,150,914 shares of common stock
including 124,271 shares to advisors at 94.5 pence or US$1.85 per share for
gross proceeds of US$5.6 million and received a conditional commitment for
additional funds of US$300,000.
In October 2007, Napo issued 2,844,584 shares of common stock at 70 pence
(approximately US$1.41 per share).
In December 2007 and January 2008 the Company entered into subscription
agreements in connection with the issuance of US$1,475,000 of 8% Convertible
Notes due 2010 ("2007 Notes"). Of this amount, US$975,000 was received in
December 2007 and the remaining US$500,000 was received in January 2008. These
notes were subsequently amended in March 2008 to have a maturity date of 31 May
2009. The notes are 100% convertible at US$0.55 per share, representing
2,665,896 common shares of Napo. Holders of the 2007 Notes also received
warrants to purchase 1,332,948 shares of Napo common stock at US$0.55 per share.
As of 31 December 2007 Napo had cash and cash equivalents plus short term
investments of US$7.2 million and no bank borrowings and with US$975,000 of
convertible debt. Cash and cash equivalents plus short term investments at the
beginning of the year was US$18.4 million.
There was no capitalised interest in either period.
Earnings Per Share and Dividends
The net loss per common share in the year ended 31 December 2007 was US$0.59 per
share or �0.29 compared to 31 December 2006 at US$0.83 or �0.41 GBP. Napo does
not plan to pay any dividends in the foreseeable future, if ever.
The closing market price of the Company's shares at the end of the financial
year in 2007 was 46.5 pence (31 December 2007): and the range of market prices
during the year was between 46.5 pence and 96 pence.
Credit Risk
Napo holds significant cash balances which are invested on a short-term basis.
These deposits and other financial instruments give rise to credit risk on
amounts due from counterparties. Credit risk is managed by limiting the
aggregate amount and duration of the exposure to any one counterparty by
reference to its credit rating. Counterparties are chosen based on yield,
availability of funds, credit rating and quality of service.
The maximum maturity of the portfolio may not exceed 36 months with the average
maturity not to exceed 18 months. Eligible investment includes US treasury
securities, asset-backed securities with a minimum rating of AAA, and A-1 rated
money market instruments.
Subsequent Event
In March 2008, Napo entered into note and warrant purchase agreements for the
issuance of convertible promissory notes that bear interest at a rate of 3.2 per
cent for a total of US$2,250,000 ("2008 Notes"). Up to 25 per cent of the
principal amount of the 2008 Notes are convertible into shares of Napo common
stock at a price of 27.9 pence per share. If the maximum conversion takes place,
the Company would issue 1,016,655 shares of Napo common stock. The remaining 75
per cent of the 2008 Notes are repayable in cash on 31 July 2008. Holders of the
2008 Notes were also issued warrants to purchase 3,049,965 common shares of Napo
common stock exercisable at any time from 31 July 2008 until 3 March 2013 at the
conversion price of 27.9 pence per share.
In March 2008, coincident with the 2008 Notes Napo issued 600,000 shares of
common stock to an investor at 25 pence per share.
Consolidated Balance Sheets
2007 2006
$ $
Assets
Cash and cash equivalents 1,502,006 920,704
Short-term investments 5,736,971 18,803,881
Stock subscriptions receivable - 599,998
Prepaid expenses and deposits 193,650 36,856
Accounts receivable 160,925 -
Other current assets 583,611 221,712
Total current assets 8,177,163 20,583,151
Property and equipment, net 588,941 425,961
Prepaid license fee 1,369,565 -
Deposits 79,888 -
Patent, net 83,329 111,109
Total Assets 10,298,886 21,120,221
Liabilities and Stockholders' Equity (Deficit)
Accounts payable 2,732,917 414,060
Accrued compensation 492,069 535,415
Other current liabilities 697,791 1,350,206
Total current liabilities 3,922,777 2,299,681
Convertible notes payable 975,000 -
Total Liabilities 4,897,777 2,299,681
Convertible redeemable preference shares
(Optionally convertible, redeemable preference shares, 1 Indian 6,848,330 5,710,830
Rupee par value, 3,886,555 and 3,529,412 shares authorized, issued
and outstanding at 31 December 2007 and 2006, respectively,
aggregate liquidation preference of US$6,848,330 and US$5,710,830 at
31 December 2007 and 2006, respectively)
Commitments and Contingencies (Note 4)
Stockholders' Equity (Deficit)
Common stock: $0.0001 par value, 90,000,000 shares authorised; 4,931 3,991
49,215,080 and 39,910,222 shares issued and outstanding at 31
December 2007 and 2006, respectively
Common stock subscribed - 49
Stock subscriptions receivable - (300,000)
Accumulated other comprehensive income (loss) 12,954 (7,658)
Additional paid-in capital 47,661,518 36,328,335
Deficit accumulated during the development stage (49,079,151) (22,915,007)
Treasury stock, at cost, 125,614 shares at 31 December 2007 (47,473) -
Total Stockholders' Equity (Deficit) (1,447,221) 13,109,710
Total Liabilities and Stockholders' Equity (Deficit) 10,298,886 21,120,221
See summary of accounting policies and notes to consolidated financial statements.
Consolidated Statements of Operations
Year Ended 31 December Period from
Inception (15
November
2001) through
31
2007 2006 2005 December
$ $ $ 2007
$
Revenue 303,297 1,238,444 8,973 2,865,135
Operating expenses:
Cost of revenue - - 37 194,601
General and administrative expense(1) 7,052,738 4,361,064 2,090,909 16,781,093
Research and development expense(2) 19,495,072 7,469,626 1,297,076 31,267,215
Total operating expenses 26,547,810 11,830,690 3,388,022 48,242,909
Loss from operations (26,244,513) (10,592,246) (3,379,049) (45,377,774)
Gain from insurance recovery - 172,051 - -
Interest (expense) income, net 685,388 340,447 (22,758) 771,335
Other income, net 32,481 9,114 65,200 106,795
Net loss (25,526,644) (10,070,634) (3,336,607) (44,499,644)
Deemed dividends (637,500) (3,942,007) - (4,579,507)
Net loss attributable to common (26,164,144) (14,012,641) (3,336,607) (49,079,151)
stockholders
Basic and diluted net loss per common (0.59) (0.83) (82.42)
share (USD)
Basic and diluted net loss per common (0.29) (0.41) (42.09)
share (pounds)
Shares used in basic and diluted net loss 44,451,285 16,925,408 40,484
per common share calculation
Included in operating expenses is noncash
stock-based compensation as follows:
(1) General and administrative expense 197,578 239,559 31,949 659,481
(2) Research and development expense 1,746,332 767,437 15,762 2,619,064
See summary of accounting policies and notes to consolidated financial statements.
Statement of Stockholder's Equity, Optionally Convertible Redeemable
Preference Shares ("OCRPS") and Accumulated Other Comprehensive Income
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Consolidated Statements of Operations
Year Ended 31 December Period from
Inception
(15 November
2001) through
2007 2006 2005 2007
$ $ $ $
Operating Activities
Net loss (25,526,644) (10,070,634) (3,336,607) (44,499,644)
Adjustments to reconcile net loss
to net cash used
in operating activities:
Depreciation and amortization 253,814 134,445 49,130 531,095
In-process research and 4,092,758 - - 4,092,758
development purchased with common
stock
Stock based compensation expense 1,943,910 1,006,996 47,711 3,278,545
Issuance of preferred stock to pay - - - 569,169
predecessor expenses
Changes in assets and liabilities:
Prepaid expenses and deposits (236,682) 7,457 8,358 (273,538)
Accounts receivable (160,925) - - (160,925)
Other current assets (286,822) (154,140) (19,708) (508,544)
Accounts payable 2,318,857 278,613 4,466 2,732,917
Accrued compensation (43,346) 280,116 (187,657) 492,069
Other current liabilities (723,818) 1,346,574 32,322 626,388
Total Cash Used in Operating (18,368,898) (7,170,573) (3,401,985) (33,119,710)
Activities
Investing Activities
Purchase of property and equipment (389,014) (480,761) (37,863) (952,764)
Purchase of short-term investments (4,249,290) (27,715,339) - (31,964,629)
Sale of short-term investments 17,340,380 8,903,800 - 26,244,180
Prepaid license fee (1,369,565) - - (1,369,565)
Purchase of patent - - - (250,600)
Total Cash Provided by (Used in) 11,332,511 (19,292,300) (37,863) (8,293,378)
Investing Activities
Financing Activities
Proceeds from issuance of common - 18,934,244 - 18,934,244
stock
on initial public offering
Proceeds from issuance of 500,000 2,858,021 - 3,358,021
convertible redeemable preference
shares, net
Proceeds from issuance of 975,000 - - 3,431,000
convertible notes payable
Proceeds from exercise of - 1,346,018 - 1,346,018
preferred and common stock
warrants
Sale of preferred stock for cash - 2,654,110 4,250,806 9,295,304
Sale of common stock for cash, net 5,241,508 369,030 - 5,611,153
of issuance costs
Proceeds from stock option 1,183 38,163 - 39,356
exercises
Proceeds from issuance of common 899,998 - - 899,998
stock under subscription
Total Cash Provided by Financing 7,617,689 26,199,586 4,250,806 42,915,094
Activities
Net increase (decrease) in cash 581,302 (263,287) 810,958 1,502,006
Cash and cash equivalents, 920,704 1,183,991 373,033 -
beginning
of period
Cash and Cash Equivalents, end of 1,502,006 920,704 1,183,991 1,502,006
period
Year Ended 31 December Period from Inception
(15 November
2001) through
2007 2006 2005 2007
$ $ $ $
Supplemental
Schedule of
Non-Cash
Investing and
Financing
Activities:
Conversion of - 13,584,652 - 13,584,652
preferred stock
in connection
with initial
public offering
Issuance of 4,100,000 - - 4,100,000
common stock in
connection with
acquisition
Deemed dividend - 2,294,118 - 2,294,118
on optionally
convertible
redeemable
preference
shares
Accretion of 637,500 416,712 - 1,054,212
optionally
convertible
redeemable
preference
shares
Deemed dividend - 1,231,177 - 1,231,177
on preferred
stock
Issuance of - 900,000 - 900,000
common stock
under
subscription
agreements
Issuance of - - 170,000 2,456,000
preferred stock
as repayment
of short-term
notes
Interest paid - - 30,224 73,840
with preferred
stock
See summary of accounting policies and notes to
consolidated financial statements.
SUMMARY OF ACCOUNTING POLICIES AND NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Organisation, Business and Basis of Presentation
Napo Pharmaceuticals, Inc. ("Napo" or "the Company ") was incorporated on 15
November 2001 in Delaware and is focused on licensing, developing and
commercialising proprietary specialty pharmaceuticals for the global marketplace
in collaboration with development partners. Napo is currently developing its
proprietary product, crofelemer, for gastrointestinal indications such as
diarrhoea-predominant Irritable Bowel Syndrome (D-IBS), chronic diarrhoea in
people living with HIV/AIDS (AIDS diarrhoea), pediatric diarrhoea and acute
infectious diarrhoea. The Company operates in one segment.
The Company is considered to be in the development stage as, since inception,
its activities have consisted primarily of acquiring the rights to crofelemer,
raising capital, attracting employees, establishing facilities, performing
research and development, entering into agreements with other entities for the
development and commercialisation rights to crofelemer and the analysis of its
collection of plant samples for bioactive molecules which could result in
potential new drug candidates. Revenue received from inception to date includes
initial license payments and miscellaneous sales of non-core product obtained
through the purchase of certain Shaman Pharmaceutical, Inc. assets also
discussed below.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and include the
accounts of the Company and its wholly owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in consolidation.
Liquidity
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. At 31 December 2007, Napo had an accumulated deficit of
approximately US$49.1 million and expects to incur substantial losses over the
next several years while it continues in the development stage. The Company's
operations are subject to certain risks and uncertainties frequently encountered
by companies in the early stages of operations, particularly in the evolving
market for small biotech and specialty pharmaceuticals companies. Such risks and
uncertainties include, but are not limited to, timing and uncertainty of
achieving milestones in clinical trials and in obtaining approvals by the Food
and Drug Administration (the "FDA") and regulatory agencies in other countries,
not only by the Company, but by its licensees as well. The ability to generate
revenues in the future will depend substantially on the timing and success of
reaching development milestones and in obtaining regulatory approvals and market
acceptance of the Company's products, assuming the FDA, and similar regulatory
authorities in other countries, approves new drug applications.
The Company plans to meet its future capital requirements and to complete its
clinical studies to obtain the necessary FDA approvals requires substantial
amounts of additional sources of funding. Management has plans to raise
additional funds, which include: (a) pursuing a partnership in relation to the
development and marketing of crofelemer and NP 500 in Asia; (b) seeking
additional funding strategies including debt and further equity issuances; and
(c) seeking fundraising and/or collaboration associated with the CFTR inhibitor
mechanism.
There is no assurance that the Company will be successful in obtaining a
partnership or sufficient funding on acceptable terms, if at all. If Napo is
unable to secure additional funding and, shareholders, if required, do not
approve such financing, Napo would have to curtail certain expenditures which it
considers necessary for optimizing the probability of success of Napo's clinical
development programs, including delaying the CRO-HIV clinical trial which would
have a material adverse effect on the Company's operations. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Company's management to
make judgments, assumptions and estimates that affect the amounts reported in
its consolidated financial statements and the accompanying notes. Actual results
could differ materially from those estimates. Significant estimates include, but
are not limited to, valuation of stock based compensation and deferred tax
assets, and impairment of long lived assets and intangible assets.
Concentration of Credit Risk and Cash and Cash Equivalents
The financial instruments that potentially subject the Company to a
concentration of credit risk are cash equivalents and short-term investments.
The counterparty to the agreement relating to the Company's investment
securities is a financial institution of high credit standing. The Company
considers all highly liquid instruments with an original maturity of three
months or less to be cash equivalents. Cash is placed with a high-credit quality
financial institution. Cash is generally in excess of FDIC insurance limits.
Napo is exposed to credit risk in the event of default by the financial
institution holding the cash to the extent of the amount recorded on the balance
sheet. The carrying value of cash and cash equivalents approximates estimated
market value at 31 December 2007.
Short-Term Investments
All short-term investments are classified as available-for-sale and therefore
carried at estimated fair value based on quoted market prices. All investments
are highly liquid (can be liquidated in less than one month) with a ready
market. The Company views its available-for-sale portfolio as available for use
in its current operations. Accordingly, all investments are classified as
short-term, even though the stated maturity date may be one year or more beyond
the current balance sheet date. Available-for-sale securities are stated at
estimated fair value based upon the quoted market price of the securities.
Unrealized gains and losses on such securities are reported as a separate
component of stockholders' equity. Realized gains and losses on
available-for-sale securities are included in interest income/expense. The cost
of securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
interest income.
The following table summarizes the maturities of the Company's investments at 31
December 2007 (US$):
Amortized Cost Gross Unrealized Fair Value
Losses
Less than 1 year 3,654,181 (13,610) 3,667,791
Due 1-2 years 594,836 656 594,180
Due in 2025 375,000 - 375,000
Due in 2028 1,000,000 - 1,000,000
Due in 2040 100,000 - 100,000
Total 5,724,017 (12,954) 5,736,971
Intangible Asset
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Intangible Assets, the Company performs an annual
impairment test for the intangible asset. If the carrying amount is in excess of
the fair value, an impairment loss will be recorded. No impairment has been
recorded through the date of these financial statements.
The purchased intangible asset represents a composition of matter patent on
crofelemer. A composition of matter patent affords patent protection on the
novel chemical structure of crofelemer, previously undescribed in the scientific
literature. The purchased intangible asset is carried at cost, net of
accumulated amortization and is amortized over its remaining estimated useful
life of nine years; being the remaining legal patent life without extensions.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets; generally three years.
Impairment of Long-Lived Assets
In accordance with the provisions of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, the Company reviews long-lived assets,
including property and equipment, for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not
be fully recoverable. Under SFAS No. 144, an impairment loss would be recognised
when estimated undiscounted future cash flows expected to result from the use of
the asset and its eventual disposition are less than its carrying amount.
Impairment, if any, is assessed using discounted cash flows or other appropriate
measures of fair value. Through 31 December 2007, there have been no such
losses.
Foreign Currency Translation
Napo translates the assets and liabilities of its foreign subsidiaries to US$ at
the rates of exchange in effect at the end of the period. Expenses are
translated using rates of exchange in effect during the period.
Research and Development Expenses
Research and development expenses consist of expenses incurred in performing
research and development activities including related salaries, clinical trial
and related drug product costs, contract services and other outside service
expenses. Research and development expenses are charged to operating expense in
the period incurred.
Napo is currently conducting a phase III trial for crofelemer for the indication
of chronic diarrhoea associated with HIV/AIDS.
Napo is also currently conducting a trial for crofelemer for the indication of
cholera. This trial is being conducted at the International Center for
Diarrhoeal Disease in Bangladesh. Approximately 134 patients have been treated
since March 2006.
Income Taxes
Napo uses the liability method for income taxes as required by SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax reporting bases of assets and liabilities and are measured using enacted tax
rates and laws that are expected to be in effect when the differences are
expected to reverse. Currently there is no provision for income taxes as the
Company has incurred net losses since inception. To date, Napo has no history of
earnings. Therefore, net deferred tax assets are reduced by a valuation
allowance to the extent that realization of the related deferred tax asset is
not assured. The Company has recorded a valuation allowance for the full amount
of its calculated deferred tax assets.
In June 2006, the Financial Accounting Standards Board issued Interpretation
No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109. This interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition of tax
benefits, classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure, and transition.
Basic and Diluted Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. The
computation of basic net loss per share for all periods presented is derived
from the information on the face of the statements of operations, and there are
no reconciling items in either the numerator or denominator.
Diluted net loss per common share is computed as though all potential common
shares that are dilutive were outstanding during the year, using the treasury
stock method for the purposes of calculating the weighted-average number of
dilutive common shares outstanding during the period. Potential dilutive common
shares consist of shares issuable upon exercise of stock options and warrants.
The Company has excluded 7,419,422, 8,724,630 and 7,633,306 shares from the
diluted net loss calculation for the years ended 31 December 2007, 2006 and
2005, respectively, because their inclusion would have been anti-dilutive.
Revenue Recognition
Napo has a federal government research grant which provides for the
reimbursement of qualified expenses for research and development related to a
cholera study, as defined under the terms of the grant agreement. Revenue under
this grant agreement is recognized when the related qualified research expenses
are incurred. Grant reimbursements are received on a quarterly or monthly basis
and are subject to the issuing agency's right of audit. During the years ended
31 December 2007 and 2006, the Company recognized US$303,297 and US$243,850,
respectively, of revenue under this grant.
Milestone payments under research, partnering, or licensing agreements are
recognized as revenue upon the achievement of mutually agreed upon milestones,
provided that (i) the milestone event is substantive and its achievement is not
reasonably assured at the inception of the agreement, and (ii) there are no
performance obligations associated with the milestone payment.
Stock-Based Compensation
Effective 1 January 2002, Napo adopted the preferable fair value recognition
provisions of SFAS No. 123, Stock-Based Compensation. In December 2004, the
Financial Accounting Standards Board "FASB") issued SFAS No. 123(R), Share-Based
Payment, which is a revision of SFAS No. 123. SFAS 123(R) supercedes Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
at the date of grant and to record that cost as compensation expense over the
period during which the employee is required to perform service in exchange for
the award (generally over the vesting period of the award). Excess tax benefits,
as defined by SFAS 123(R), will be recognized as an addition to additional
paid-in capital. The Company adopted SFAS 123(R) with application since
inception.
The Company has calculated stock-based compensation expense using the
Black-Scholes option valuation model and included the portion of share-based
payment awards that is ultimately expected to vest during future periods.
Historically, there have been relatively few forfeitures. At this time, no
significant additional forfeitures are expected in the foreseeable future.
However, in the event that there are forfeitures, estimates will be revised to
reflect actual experience. Stock-based compensation expense is recognized on a
straight-line basis.
Recent Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an Amendment of FASB Statement 133.
Statement No. 161 enhances required disclosures regarding derivatives and
hedging activities, including enhanced disclosures regarding how: (a) an entity
uses derivative instruments; (b) derivative instruments and related hedged items
are accounted for under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities; and (c) derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash flows.
Specifically, SFAS No. 161 requires disclosure of the objectives for using
derivative instruments be disclosed in terms of underlying risk and accounting
designation, disclosure of the fair values of derivative instruments and their
gains and losses in a tabular format, disclosure of information about
credit-risk-related contingent features and a cross-reference from the
derivative footnote to other footnotes in which derivative-related information
is disclosed. FASB No. 161 is effective for fiscal years and interim periods
beginning after 15 November 2008.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations ("SFAS No. 141R"). SFAS No. 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS No. 141R is effective as
of the beginning of an entity's fiscal year that begins after 15 December 2008,
and will be adopted by the Company in the first half of 2009. Napo does not
believe that the adoption of SFAS 141R will have material impact on its
consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51. Statement No.
160 establishes new accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a noncontrolling
interest (minority interest) as equity in the consolidated financial statements
and separate from the parent's equity. The amount of net income attributable to
the noncontrolling interest will be included in consolidated net income on the
face of the income statement. Statement No. 160 clarifies that changes in a
parent's ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. Statement No. 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. Statement No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after 15 December
2008.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115. SFAS No. 159 expands the use of fair value accounting but
does not affect existing standards which require assets or liabilities to be
carried at fair value. The objective of SFAS No. 159 is to improve financial
reporting by providing companies with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. Under SFAS No. 159,
a company may elect to use fair value to measure eligible items at specified
election dates and report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. Eligible items include but are not limited to, accounts and loans
receivable, available-for-sale and held-to-maturity securities, equity method
investments, accounts payable, guarantees, issued debt and firm commitments. If
elected, SFAS No. 159 is effective beginning 1 January 2008. The Company is
currently assessing whether fair value accounting is appropriate for any of its
eligible items and the impact, if any, it will have on its results of operations
and financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. The
provisions of SFAS No. 157 were originally effective for the fiscal year
beginning 1 January 2008. The FASB has deferred the implementation of SFAS No.
157 by one year and it will be effective for the fiscal year beginning 1 January
2009. The Company is currently evaluating the impact of the provisions of
SFAS No. 157 on its financial position, results of operations and cash flows and
does not believe the impact of the adoption will be material.
Notes to the Consolidated Financial Statements
1. License and Other Agreements
Revenue from the License or Assignment of Intellectual Property Rights
The Company recognises revenue from the license or assignment of intellectual
property rights to third parties, including development milestone payments
associated with such agreements if the funds have been received, the rights to
the property have been delivered, and the Company has no further obligations
under the agreements in accordance with the date(s) when the payment has been
received or collection is assured. In June 2004, the Company recognized
US$950,000 of license revenue from the grant of a license to Trine
Pharmaceuticals, Inc. for the worldwide development and commercialization rights
to Crofelemer for the indication of D-IBS.
Royalty Revenue
In May and June 2005, the Company entered into licensing agreements with
AsiaPharm Group Ltd, based in the Peoples Republic of China and Glenmark
Pharmaceuticals Limited, based in Mumbai, India, for the license of Crofelemer
for the indications of AIDS-related diarrhoea, acute infectious diarrhoea and
pediatric diarrhoea in their respective territories. AsiaPharm Group, through
its subsidiary, AsiaPharm Investments Ltd., invested in Napo Series C preferred
stock as did Glenmark Pharmaceuticals. No royalty revenue has been recognized
from these licenses to date.
2. Property and Equipment
Property and equipment consists of the following (US$):
31 December
2007 2006
Lab equipment 780,026 513,186
Office equipment 62,963 49,265
Construction in progress 92,447 -
Software 16,029 -
Furniture and fixtures 1,299 1,299
952,764 563,750
Less accumulated depreciation (363,823) (137,789)
Property and equipment, net 588,941 425,961
3. Leases
The Company entered into a lease agreement in June 2007 for office space under a
noncancelable operating lease, expiring in December 2007. Previous to June 2007,
this same space was leased on a month-to-month basis. Rent expense under this
operating lease for the years ended 31 December 2007, 2006 and 2005 amounted to
US$262,000, US$189,000 and US$162,000, respectively.
The Company has also entered into two separate noncancelable lease agreements
for new office space, commencing 1 April 2007. The first lease expires on 31
March 2010 and the second lease, beginning on 1 April 2010, expires on 31 March
2014. These two leases relate to the same property, the first being a sub-lease
and the second being a primary lease with the ultimate landlord. For the second
lease, the Company may be required to provide a letter of credit to the landlord
for US$385,000 as additional security for Napo's performance under the lease.
This letter of credit has not yet been provided by the Company. Rent expense
under these operating leases amounted to US$307,000 during the year ended 31
December 2007.
Future minimum lease payments under these noncancelable leases at 31 December
2007 are as follows:
2008 $199,497
2009 225,771
2010 483,054
2011 581,404
2012 599,157
Thereafter 772,247
$2,861,130
4. Commitments and Contingencies
General
On 14 November 2007, certain members of Napo management and all members of the
Company's board of directors were granted the right to receive an aggregate of
1,100,000 shares of the common stock of the Company upon the occurrence of
certain criteria, including a 250% increase in the value of Napo common stock
from its price at the time of the grant. If the criteria are not met within two
years from the date of grant, the right to receive the shares will expire. If
the criteria are met within two years from the date of grant, these shares will
be issued to the recipients and will be fully vested at that time. The exercise
price for these shares is US$1.40.
The Company has at-will employment agreements with certain of its employees that
provide severance payments, including healthcare benefits to be paid in the
event of a change of control of Napo, defined in the agreements as a transaction
where more than 50% of the total combined voting power of its outstanding
securities changes ownership, whereby pursuant to a change of control any of the
following occur: (i) the employment of these employees is not maintained; (ii)
their compensation is changed; (iii) their job title is changed; or (iv) the
geographic location of their workplace is changed.
The severance payments vary in length from 6 months to 12 months of the
employee's then current level of compensation, including healthcare benefits, as
set by the board of directors. As of 31 December 2007, the cost of such
severance would equal approximately US$1.2 million.
The Company's has two licensing agreements which contain provisions whereby Napo
has agreed to indemnify and hold harmless its licensees from claims or damages
arising from the licensing arrangements. In one agreement, the indemnification
relates to any losses arising out of or resulting from any third-party claims
made or suits brought against the licensee which arise or result from the breach
of certain representation made by the Company, infringement of unrelated third
party intellectual property rights, the Company's negligence or will misconduct
in performance of the agreement, any personal injury or death associated with
clinical trials, and any product recall or product liability claims, if the
cause of action is based upon a defect in the Company's licensed intellectual
property. In the second agreement, the indemnification relates to losses arising
out of or resulting from the Company's failure to comply with applicable laws,
defend the licensee from allegations of infringement of unrelated third party
intellectual property rights, and the Company's failure to perform under the
agreement to generally accepted industry standards.
The Company is subject to various legal proceedings and disputes that arise in
the normal course of business. These matters include employee claims. The
Company does not know whether it will prevail in these matters nor can it assure
that any remedy could be reached on viable terms, if at all. Based on currently
available information, the Company believes that it has meritorious defenses to
these actions and should an unfavorable outcome arise, there can be no assurance
such outcome would not have material adverse effect on its future results of
operations, liquidity or financial position.
Trine Pharmaceuticals, Inc.
In June 2004, the Company entered into an agreement with Trine Pharmaceuticals,
Inc. ("Trine") regarding certain development responsibilities and
commercialization rights of crofelemer, including worldwide development and
commercialization rights for IBS and HIV. In accordance with this agreement,
Trine made a US$1,000,000 cash milestone payment in 2006. This amount has been
recorded as revenue in these consolidated financial statements.
In February 2008, as part of a mutual termination, full commercial rights of
crofelemer previously licensed to Trine Pharmaceuticals, Inc. have reverted to
Napo. As part of the termination, Napo has agreed to pay US$500,000 and
US$750,000 CRO-HIV success milestone payments to Trine based on the first and
second to occur, respectively, of the following milestones: (1) The Company's
filing of an NDA for CRO-HIV, (2) the Company's receipt of FDA approval to
commercialize crofelemer for CRO-HIV, (3) the Company's execution of an
agreement granting rights to develop and/or commercialize crofelemer for
CRO-HIV, and (4) a change in control of the Company. There are no additional
future obligations to Trine.
License Agreement with Michael Tempesta
The Company has entered into a license agreement dated 16 October 2002 with
Michael Tempesta. This agreement settled disputes between Shaman
Pharmaceuticals, Inc. ("Shaman"), the Company's predecessor, and Dr. Tempesta
relating to previous license arrangements between Shaman or the Company and Dr.
Tempesta. The agreement provides for the payment of a royalty to Dr. Tempesta of
between 2 per cent and 4 per cent of net sales of products containing Crofelemer
or any derivative thereof obtained from any species of the Croton plant.
"Product" for the purposes of calculating royalties is defined as all products
for the treatment, maintenance or improvement of human health which are
prescription medicines, botanicals, dietary supplements sold for the treatment
of diarrhoea, Irritable Bowel Syndrome ("IBS") or herpes. This excludes cosmetic
products, non-medicinal agricultural products and products for non-human animal
health. To date, no payments have been made under this perpetual license
agreement.
Healing Forest Conservancy
The Company has entered into a perpetual agreement with the Healing Forest
Conservancy ("HFC") pursuant to which the Company has issued to HFC 30,000
common shares in Napo at a purchase price of $0.0001 each and has agreed to pay
2 per cent of the net profit derived from the sale of all of its products to HFC
once Napo has achieved net profits after tax over a consecutive period of 6
months. The aim of Napo's arrangement with HFC is, amongst other things, (i) to
promote the conservation of the biological diversity of tropical forests,
particularly medicinal plants (ii) to promote the survival of cultural diversity
of tropical forest peoples, and in particular, their traditional knowledge of
medicinal plants, (iii) to develop and implement a process to return financial
benefits from net profits made on certain products to collaborating countries
and cultural groups, (iv) to promote initiatives addressing total community
health for developing and emerging communities; and (v) to lead efforts to
encourage sustainable global communication and participation from other
organizations, including corporate, non-governmental organizations, governmental
agencies, and others.
5. Convertible Notes Payable
In December 2007, the Company issued convertible notes payable for US$975,000
(the "2007 Notes"). These notes are for a term of three years and bear interest
at 8% until the notes are paid or converted into common stock. The notes may not
be converted before an equity financing of $10 million or more or 1 July 2008,
whichever is earlier. Only the principal is convertible. Interest will be paid
in cash. If the Company enters into an equity fundraising in excess of US$10
million prior to 1 July 2008, the notes are convertible into common stock at the
same price as the investors in the financing. If no equity financing occurs
prior to 1 July 2008, the notes will be convertible into common stock at the ten
day average price as traded on the London Stock Exchange. The conversion price
cannot be less than US$0.38 per share. It has been determined that the
conversion feature embedded in the 2007 Notes should not be bifurcated and the
host instrument is classified as a liability at 31 December 2007.
6. Stockholders' Equity (Deficit)
Initial Public Offering
On 31 July 2006, upon the initial public offering of its common stock on the
Main Market of the London Stock Exchange, Napo issued 14,300,048 shares of
common stock at an offering price of US$1.54 per share. At that time all Series
A, B and C Convertible Preferred Stock automatically converted into 21,352,958
shares of common stock. Cash proceeds from the sale, net of underwriters'
discount and offering expenses, totalled US$18.9 million. Total shares of Napo
common stock outstanding immediately subsequent to the IPO were 39,536,282.
Common Stock
90,000,000 shares of Common Stock are authorized, with a par value of US$0.0001
per share. The Company has reserved shares of common stock for future issuance
as follows:
31 December 2007
Stock options outstanding 9,162,565
Stock options available for future grant 4,041,662
Warrants to purchase common stock 112,634
13,316,861
In January 2007, Napo sold 2,431,304 shares of common stock to an investor at
US$1.85 per share. Total cash proceeds were US$4.1 million, net of issuance
costs of US$423,000.
In October 2007, Napo sold 2,490,171 shares of common stock to various investors
at US$1.46 per share. Total cash proceeds were US$1.2 million, net of issuance
costs of US$2.4 million.
On 23 October 2007, the Company entered into an Agreement and Plan of Merger
(the "Merger") with Indus Pharmaceuticals, Inc. ("Indus") whereby the Company
agreed to acquire 100% of the outstanding shares of Indus for 2,906,193 shares
of Napo common stock valued at US$4.1 million. Although there were also net
assets of US$8,000 acquired in the Merger, the substance of the transaction was
to purchase in-process research and development related to cancer, diabetes and
infectious disease from Indus. As of the date of the Merger, Napo recorded
current assets of US$79,000 and current liabilities of US$71,000. The remainder
of the purchase price was immediately recorded as in-process research and
development expense.
Optionally Convertible, Redeemable, Non-Cumulative, Non-Participating Preference
Shares
In October 2007, IL&FS Investment Managers Limited ("IL&FS"), a third-party
investor, invested US$500,000 in Sindu Private Limited ("Sindu") in exchange for
10 shares of Sindu common stock and 357,143 optionally convertible, redeemable,
non-cumulative, non-participating preference shares of Sindu having a par value
of Rupee Ten ("Sindu OCRPS"). The Sindu OCRPS held by IL&FS has a term of four
(4) years from the completion of the subscriptions as set forth in the
subscription agreement. During the four (4) year term, IL&FS can require Sindu
to sell in part or in full the number of shares that Sindu holds of Napo
Pharmaceutical common stock and pay the proceeds to IL&FS. Also, during the
term, IL&FS can convert the OCRPSs into Sindu's common shares, such that the
value of Sindu's common shares will be the initial investment plus the 30%
annualized premium. At the end of the four (4) year term, the redemption, as
described below, is compulsorily redeemable.
Subsequent to this investment, Napo US acquired 100% of the stock of Sindu.
These consolidated financial statements include the accounts of Sindu at 31
December 2007.
The Sindu OCRPS have a redemption premium that yields for IL&FS an internal rate
of return of 30 per cent per annum on their US$500,000 investment, calculated
from the date of the investment in Sindu until the date of actual receipt by IL&
FS of the redemption of the OCRPS. This redemption premium resulted in deemed
dividends of US$38,000 during the year ended 31 December 2007.
In April 2006, IL&FS invested US$3 million in Napo India Private Limited ("Napo
India"), a company organized by Napo for the purpose of this investment and its
ongoing activity in India, in exchange for 100 shares of Napo India and
3,529,412 optionally convertible, redeemable, non-cumulative, non-participating
preference shares of Napo India having a par value of Rupee One ("Napo India
OCRPS"). Napo India subsequently invested the US$3 million invested by IL&FS in
the Company's Series C Preferred Stock at US$0.85 per share pursuant to a
subscription agreement dated 19 April 2006. The Napo India OCRPS held by IL&FS
has a term of four (4) years from the completion of the subscriptions as set
forth in the subscription agreement. During the four (4) year term subsequent to
the initial public offering and associated lock-up period, IL&FS can exchange,
one for one, into common shares of Napo India, in part or in full, the OCRPSs;
or require Napo India to sell the common shares of Napo Pharmaceuitcals it holds
and pay the proceeds to IL&FS. If no action is taken during the four (4) year
term and the term expires, the OCRPS is then compulsorily exchangeable for an
amount equal to the investment plus the 20% annualized redemption premium.
Subsequent to Napo India's investment in Napo Series C Preferred stock, the
Company bought 10,000 Shares of Napo India from the existing shareholders of
Napo India, and Napo India became an approximately 99 per cent owned subsidiary
of the Company. These consolidated financial statements include the accounts of
Napo India at 31 December 2007.
The Napo India OCRPS have a redemption premium that yields for IL&FS an internal
rate of return of 20 per cent per annum on their US$3,000,000 investment,
calculated from the date of the investment in Napo India until the date of
actual receipt by IL&FS of the redemption of the OCRPS. This redemption premium
resulted in deemed dividends of US$600,000 and US$417,000 during the years ended
31 December 2007 and 2006, respectively. In addition, it was determined that
there was a beneficial conversion feature associated with the Napo India OCRPS
due to the fair value of the Company's common stock being more than the price
per share paid by the investor for the Napo India OCRPS. As such, the Company
recorded a deemed dividend of $2,294,118 in 2006.
The rights under these agreements are subject to any changes in current India
law.
Warrants
During 2002, the Company issued fully vested and immediately exercisable
warrants to purchase 83,479 shares of common stock at US$0.30 per share, for a
period of ten years, to three individuals in return for services provided to the
Company. These warrants were valued at US$3,000, and recorded as additional
paid-in capital. As of 31 December 2007, none of these warrants have been
exercised.
During 2002, the Company issued warrants to purchase 100,067 shares of Series A
Preferred Stock at US$0.2998 per share, valued at US$3,000, to its outside
counsel for legal fees. These warrants were exercised at the time of the
Company's initial public offering.
In March 2004 the Company issued warrants to purchase 2,329,616 shares of common
stock at US$0.50 per share, valued at US$108,000, to investors in connection
with the issuance of Series A preferred stock. These warrants were exercised at
the time of the Company's initial public offering.
In September 2004, the Company issued warrants to purchase 175,000 shares of
common stock at US$0.50 per share, valued at US$8,000, to investors in
connection with the issuance of Series B preferred stock. These warrants were
exercised at the time of the Company's initial public offering.
In September 2005, the Company issued warrants to purchase 90,000 shares of
common stock at US$0.85 per share, valued at US$6,000, in connection with the
issuance of Series C preferred stock. These warrants were exercised at the time
of the Company's initial public offering.
In September 2006, the Company issued fully vested and immediately exercisable
warrants to a consultant to purchase 15,625 shares of common stock at US$1.80,
valued at US$26,000, and recorded as additional paid-in capital. These warrants
are exercisable for three years from 15 September 2006. As of 31 December 2007,
none of these warrants have been exercised.
In December 2006, the Company issued fully vested and immediately exercisable
warrants to purchase 13,530 shares of common stock at US$1.85 per share, for a
period of five years, to a consultant for services rendered in connection with
an equity financing. These warrants were valued at US$25,000 and considered
financing related costs. As of 31 December 2007, none of these warrants have
been exercised.
Stock Options
The Napo Pharmaceuticals, Inc. 2001 Equity Incentive Plan (the "2001 Plan"),
provides for grants of incentive and nonqualified stock options, restricted
stock awards, and stock bonuses to its employees, directors and consultants.
Under the 2001 Plan, the total number of shares originally reserved and
available for grant was 2,600,000. As a result of a series of amendments which
were approved by the stockholders, the number of shares reserved and either
granted or available for grant as of 31 December 2007 is 8,500,000. Under the
2001 Plan, incentive stock options may be granted at a price per share not less
than the fair market value at the date of grant, and nonqualified stock options
may be granted at a price per share not less than 85% of the fair market value
at the date of grant. If, at the time the Company grants an option, the optionee
owns stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company, the option price shall be 110% of the fair
market value of the shares of the date of grant. Options granted generally have
a maximum term of ten years from the grant date and become exercisable over two
to three years. As of 31 December 2007, there were options to purchase 4,750,367
shares outstanding under the 2001 Plan and 3,749,633 shares available for future
grant.
The Napo Pharmaceuticals, Inc. 2006 Equity Incentive Plan (the "2006 Plan"),
provides for grants of incentive and nonqualified stock options, restricted
stock awards, and stock bonuses to the Company's employees, directors and
consultants. Under the 2006 Plan, the total number of shares reserved and
available for grant is not to exceed 10% of the outstanding common stock of the
Company. Under the 2006 Plan, incentive and nonqualified stock options may be
granted at a price per share not less than the fair market value at the date of
grant. If, at the time an option is granted, the optionee owns stock possessing
more than 10 per cent of the total combined voting power of all classes of stock
of the Company, the option price shall be 110 per cent of the fair market value
of the shares of the date of grant. Options granted generally have a maximum
term of ten years from the grant date and become exercisable over two to three
years. As of 31 December 2007, there were options to purchase 4,412,198 shares
outstanding under the 2006 Plan and 292,029 shares available for future grant.
The application of the Black-Scholes option valuation model (see Summary of
accounting policies) involves the use of assumptions that are judgmental and
sensitive in the determination of stock-based compensation expense. Expected
price volatility is based on historical data and industry experience. The key
assumptions used in determining the fair value of options granted during the
years ended 31 December 2007, 2006 and 2005 are as follows:
Years ended 31 December
2007 2006 2005
Expected price volatility 267% 267% 267%
Risk-free interest rate 4.00% 4.52% 4.42%
Weighted average expected life in 10 10 10
years
Dividend yield - - -
Forfeiture rate - - -
A summary of activity under the Plans is as follows:
Outstanding Options
Shares Number of Weighted-Average
Available Shares Price Per Share
for Grant
Balances at 31 December 2002 902,316 1,697,684 $0.043
Additional shares authorized 1,700,000 - -
Options granted (2,550,251) 2,550,251 $0.045
Balances at 31 December 2003 52,065 4,247,935 $0.044
Additional shares authorized 1,600,000 - -
Options granted (480,212) 480,212 $0.059
Balances at 31 December 2004 1,171,853 4,728,147 $0.046
Options granted (443,924) 443,924 $0.085
Balances at 31 December 2005 727,929 5,172,071 $0.049
Additional shares authorized 8,600,000 - -
Options granted (4,033,349) 4,033,349 $0.594
Options exercised - (1,247,090) $0.031
Options forfeited 275,105 (275,105) $0.180
Balances at 31 December 2006 5,569,685 7,683,225 $0.333
Additional shares authorized 648,786 - -
Options granted (4,259,000) 4,259,000 $1.493
Options exercised - (697,469) $0.069
Options forfeited 2,082,191 (2,082,191) $0.675
Balances at 31 December 2007 4,041,662 9,162,565 $0.815
The following table summarizes information about stock options outstanding at 31
December 2007:
Outstanding Options
Exercise Prices Number Outstanding Weighted-Average Options Vested
at 31 December 2007 Remaining at 31 December
Contract Life 2007
$0.030 681,731 4.79 681,731
$0.050 1,408,932 6.07 1,408,932
$0.085 252,899 7.56 205,495
$0.170 754,669 8.01 486,295
$0.340 1,552,136 8.31 1,093,760
$0.850 100,000 8.46 100,000
$1.400 2,729,000 9.88 423,574
$1.520 770,000 9.75 168,735
$1.730 300,000 8.59 165,502
$1.800 613,198 8.83 454,463
9,162,565 8.29 5,188,487
The weighted-average fair value of options granted during the years ended 31
December 2007, 2006 and 2005 was US$1.493, US$0.586 and US$0.085, respectively.
The weighted average grant date fair value of options vested at 31 December
2007, 2006 and 2005 was US$0.501, US$0.174 and US$0.170, respectively. The
weighted-average fair value of options granted during the period from inception
(15 November 2001) through 31 December 2007 was US$0.667. The weighted average
exercise price of options vested at 31 December 2007, 2006 and 2005 was
US$0.501, US$0.174 and US$0.170, respectively. There was no aggregate intrinsic
value of options vested at 31 December 2007. There was no aggregate intrinsic
value of options exercised as of the date of exercise during the years ended 31
December 2007, 2006 and 2005.
As of 31 December 2007, there was US$4 million of total unrecognized
compensation cost related to nonvested options granted under the Plans. That
cost is expected to be recognized over a weighted average period of 2.1 years.
7. 401(k) Plan
In April 2005, the Company adopted a Tax Deferred Savings Plan under Section 401
(k) of the Internal Revenue Code (the "Plan") for all full-time employees. Under
the Plan, eligible employees can contribute amounts to the Plan via payroll
withholding, subject to certain limitations. The Company's matching
contributions to the Plan are discretionary and can only be made in cash. To
date, no employer contributions have been made to the plan.
8. Income Taxes
The provision for income taxes differs from the amount of income tax determined
by applying the applicable statutory federal income tax rate to pretax loss as a
result of the following:
For the year ended 31 December,
2007 2006 2005
% % %
Statutory federal tax rate (34.0) (34.0) (34.0)
State taxes (9.0) (7.9) (5.8)
Research credits (0.6) (2.2) -
Change in valuation allowance 33.3 47.9 39.7
Non-cash compensation 1.4 (3.1) -
In-process research and development 5.5 - -
Other 3.4 (0.7) 0.1
Total provision for income taxes 0.0 0.0 0.0
Deferred tax assets are comprised of the following:
31 December,
2007 2006
$ $
Capitalized research and patents 85,031 87,103
Non deductible reserves and accruals 313,078 179,021
Credit carryforwards 641,184 433,888
Loss carryforwards 15,142,445 6,722,375
Deferred compensation 653,266 906,834
Other 99,217 95,324
Gross deferred tax assets 16,934,221 8,424,545
Valuation allowance (16,934,221) (8,424,545)
Net deferred tax assets - -
Based on the available objective evidence, including cumulative losses since
inception and expected future losses, the Company has determined that it is more
likely than not that the entire deferred tax asset amount will not be realized,
and therefore, a valuation allowance has been provided on all net deferred tax
assets.
The increases in the valuation allowance for deferred tax assets of
approximately US$8.6 million in 2007 and US$3.5 million in 2006 are primarily
attributable to increases in net operating loss and increase to research tax
credits.
At 31 December 2007, the Company had US$35.4 million and US$34.2 million of
federal and state net operating loss carryforwards, respectively, available to
offset future taxable income. The federal and state net operating loss
carryforwards will expire between 2012 and 2027, if not utilized.
At 31 December 2007, the Company had approximately US$349,000 and US$271,000 of
federal and state research credit carryovers, respectively, available to offset
future taxable income. The federal credits expire in 2027 and state research
credits carry forward indefinitely.
Utilization of the Company's net operating loss and tax credit carryforwards may
be subject to a substantial annual limitation due to the ownership change
limitations provided by the United States Internal Revenue Code and similar
state provisions. Such an annual limitation could result in the expiration or
elimination of the net operating loss and tax credit carryforwards before
ultilization.
Effective 1 January 2007, the Company adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN
No. 48"), which prescribes a comprehensive model for how a company should
recognize, measure, present and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on a tax return.
The cumulative effect of adopting FIN No. 48 resulted in no adjustment to
retained earnings as of 1 January 2007.
A reconciliation of the unrecognized tax benefits for the year ended 31 December
2007 is as follows:
Balance as of 1 January 2007 $255,000
Additions for current year tax positions -
Reductions for current year tax positions -
Additions for prior year tax positions -
Reductions for prior year tax positions -
Settlements -
Reductions related to expirations of statute of -
limitations
Balance at 31 December 2007 $255,000
None of the unrecognized tax benefits as of 31 December 2007 would affect the
Company's effective tax rate if recognized. As the Company would currently need
to increase their valuation allowance for any additional amounts benefited, the
effective rate would not be impacted until the valuation allowance was removed.
Penalties and interest expense related to income taxes are included as a
component of other expense and interest expense, respectively, if they are
incurred. For the years ended 31 December 2007 and 2006, no penalties or
interest expense related to income tax positions were recognized. As of 31
December 2007 and 2006, no penalties or interest related to income tax positions
were accrued. The Company does not anticipate that any of the unrecognized tax
benefits will increase or decrease significantly in the next twelve months.
8. Subsequent Events
In January 2008, the Company issued convertible notes payable (the "2008 Notes")
for US$500,000 on the same terms as the 2007 Notes.
In March 2008, the 2007 and 2008 Notes were amended to have a maturity date of
31 May 2009. The Notes, as amended, are convertible at US$0.55 per share,
representing 2,665,896 common shares of Napo and holders of the notes also
received warrants to purchase 1,332,948 shares of Napo for US$0.55 per share.
In March 2008, the Company entered into subscription agreements for the issuance
of convertible notes totaling US$2.3 million. These notes bear interest at 3.2%
and are due 31 July 2008. Up to 25% of the principal amount of these notes may
be converted into 1,016,655 shares of common stock and the note holders were
also issued ten-year warrants to purchase 3,049,965 shares of common stock at
US$0.55 per share.
In March 2008, the Company issued 600,000 shares of common stock to an investor
at 25 pence per share.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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