Catalyst Pharmaceuticals - 10-Q quarterly report FY

     Catalyst Pharmaceutical Partners, Inc. (the “Company”) is a development-stage specialty pharmaceutical company focused on the acquisition, development and commercialization of prescription drugs for the treatment of drug addiction. The Company was incorporated in Delaware in July 2006. It is the successor by merger to Catalyst Pharmaceutical Partners, Inc., a Florida corporation, which commenced operations in January 2002.

     The Company has incurred operating losses in each period from inception through March 31, 2007. The Company has been able to fund its cash needs to date through an initial funding from its founders, four subsequent private placements and an initial public offering (“IPO”) of its common stock.

     On September 7, 2006, the Company completed a merger with Catalyst Pharmaceutical Partners, Inc., a Florida corporation (“CPP-Florida”) in which CPP-Florida was merged with and into the Company and all of CPP-Florida’s assets, liabilities and attributes were transferred to the Company by operation of law. Prior to the merger, the Company was a wholly-owned subsidiary of CPP-Florida. The merger was effected to reincorporate the Company in Delaware.

     The Company has executed noncancellable operating lease agreements for its corporate offices. As of March 31, 2007, future minimum lease payments under the noncancellable operating lease agreements are as follows:

     During the quarter ended March 31, 2007 the Company entered into a new lease agreement for its corporate offices in Coral Gables, Florida. Rent expense was $7,711 and $4,651 for the quarters ended March 31, 2007 and 2006, respectively. The Company’s office leases expire on various dates from December 2007 to September 2012.

     The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, (FIN No. 48), on January 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”. As required by FIN 48, which clarifies SFAS No. 109, “Accounting for Income Taxes”, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitation remained open. No resulting unrecognized tax benefits were identified in connection with the implementation of FIN 48.

     The Company is subject to income taxes in the U.S. federal jurisdiction, and various states jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities for the years before 2002. If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related interest expense would be reported as a component of income tax expense.

     The Company has granted stock options to employees, officers, directors and scientific advisors of the Company generally, at exercise prices equal to the market value of the stock at the date of grant. The options generally vest ratably over four years, based on continued employment, with a maximum term of 5 to 10 years.

     The Company adopted the provisions of Statement of Financial Accounting Standards 123(R) “Share-Based Payment” (SFAS No.123R) beginning January 1, 2006, using the modified prospective transition method. The Company utilizes the Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. The Company’s expected volatility is based on the historical volatility of other publicly traded development stage companies in the same industry. The estimated expected option life is based upon estimated employee exercise patterns and considers whether and the extent to which the options are in-the-money. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate for the estimated expected life of the Company’s stock options awards. For the three month periods ended March 31, 2007 and 2006, the assumptions used were an estimated annual volatility of 100%, average expected holding periods of four to five years, and risk-free interest rates of 4.57% and 5.50%, respectively. The expected dividend rate is zero and no forfeiture rate was applied.

     The weighted average grant-date fair value of stock options granted during the three months ended March 31, 2007 and March 31, 2006 were $2.73 and $5.42, respectively. The total fair value of vested stock options for the quarters ended March 31, 2007 and 2006 were $129,753 and $23,729, respectively.

     As of March 31, 2007, there was approximately $964,000 of unrecognized compensation expense related to non-vested stock compensation awards granted under the Plan. The cost is expected to be recognized over a weighted average period of approximately 1.71 years.

     Under the Plan, participants may be granted restricted stock units, each of which represents a conditional right to receive shares of common stock in the future. The restricted stock units granted under this plan generally vest ratably over a four-year period. Upon vesting, the restricted stock units will convert into an equivalent number of shares of common stock. The amount of expense relating to the restricted stock units is based on the closing market price of the Company’s common stock on the date of grant and is amortized on a straight-line basis over the requisite service period. Restricted stock unit activity for the three months ended March 31, 2007 was as follows:

     The Company recorded stock-based compensation totaling $5,038 and $0, respectively, related to restricted stock units granted to a new employee during the three months ended March 31, 2007 and 2006. As of March 31, 2007, there was $55,412 of total restricted stock unit compensation expense related to non-vested awards not yet recognized, which is expected to be recognized over a weighted average period of 2.75 years.

     Since its inception in 2002, the Company has entered into various consulting agreements with non-employee officers and with members of the Company’s Scientific Advisory Board. Several of these agreements are with related parties under common ownership and control. During the three month period ended March 31, 2007 and 2006, the Company paid approximately $13,000 and $55,000, respectively, in consulting fees to related parties.

     In January 2005, the Company entered into an agreement with Patrick J. McEnany, to act as the Company’s Chief Executive Officer. The agreement called for an annual salary of $100,000 per year commencing on March 1, 2005. The agreement stipulated that half of Mr.McEnany’s salary was to be deferred until the Company raised equity in the amount of not less than $2,000,000. Mr. McEnany also deferred the other half of his compensation until the equity minimum was met. The condition requiring full payment of this obligation was satisfied in July 2006 when the Company closed a private placement, at which time all deferred compensation was paid to Mr. McEnany.

     This report and the information incorporated by reference into it includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding our expected financial position and operating results, our business strategy, our financing plans and forecasted demographic and economic trends relating to our business and industry are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” or “intend” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. We cannot promise that our expectations described in such forward-looking statements will turn out to be correct. Factors that may impact such forward-looking statements include, among others, our ability to successfully complete clinical trials required to file a new drug application for CPP-109, our product candidate based on vigabatrin, our ability to complete such trials on a timely basis and within the budgets we establish for such trials, our ability to protect our intellectual property, the activities of others who seek to develop and commercialize products competitive to our products, changes in the regulations affecting our business, our ability to attract and retain skilled employees, and changes in general economic conditions and interest rates. The risk factors section of our Annual Report on Form 10-K for the year ended December 31, 2006 describes the significant risks associated with our business. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

     We are a development-stage specialty pharmaceutical company focused on the acquisition, development and commercialization of prescription drugs for the treatment of drug addiction. Our initial product candidate is CPP-109, which is based on the chemical compound gamma-vinyl-GABA,commonly referred to as vigabatrin. We intend to commence a U.S. Phase II clinical trial evaluating CPP-109 as a treatment for cocaine addiction at the end of the 2007 second quarter and a U.S. Phase II clinical trial evaluating CPP-109 as a treatment for methamphetamine addiction during the third quarter of 2007.

     We recently completed an initial public offering in which we raised net proceeds of approximately $17.6 million. We are using these proceeds to complete the clinical and non-clinical studies that we believe, based on currently available information, will be required for us to file a new drug application, or NDA, for the use of CPP-109 to treat cocaine addiction. Subject to the availability of funding, we also hope to develop CPP-109 for the treatment of other addictions. There can be no assurance that we will ever receive approval of an NDA for CPP-109.

     The successful development of CPP-109 or any other product we may develop, acquire, or license is highly uncertain. We cannot reasonably estimate or know the nature, timing, or estimated expenses of the efforts necessary to complete the development of, or the period in which material net cash inflows are expected to commence due to the numerous risks and uncertainties associated with developing, such products, including the uncertainty of:

     Research and development expenses, in the aggregate, represented approximately 51% of our total operating expenses for the three months ended March 31, 2007 and 2006. Research and development expenses consist primarily of costs incurred for clinical trials and development costs related to CPP-109, personnel and related costs related to our product development activities, and outside professional fees related to clinical development and regulatory matters.

     We expect that our research and development expenses will substantially increase due to the estimated expenses of our planned U.S. Phase II clinical trials, our anticipated costs related to a clinical trial that we are sponsoring which is presently being conducted in Mexico, and any required Phase I studies and non-clinical studies that we may undertake. We estimate, based on the information available to us at this date, that we will incur approximately $15.7 million in expenses, in addition to costs previously incurred, for our further clinical trials and development costs for CPP-109 to treat cocaine addiction. These estimates assume that only one U.S. Phase III clinical trial will be required by the FDA before we are able to obtain approval of an NDA for CPP-109.

     The above costs include assumptions about facts and events that are outside of our control. For example, most of the expenses for completing the development of CPP-109 to treat cocaine addiction will be in the form of fees and expenses we will be required to pay a contract research organization (“CRO”) to conduct this work for us. The actual cost to us could be significantly greater than we currently expect. In addition, the FDA could require us to alter or delay our clinical trials at any stage, which may significantly increase the costs of that trial, as well as delay our commercialization of CPP-109 and our future revenue.

     On May 9, 2007, we issued a press release announcing that we have received positive initial top-line results in our bioequivalence study demonstrating that CPP-109 (our product-candidate based on vigabatrin) is bioavailable and bioequivalent to Sabril^®, the version of vigabatrin marketed in Europe by Sanofi Aventis. This data potentially provides a basis for linking CPP-109 to the extensive body of published pre-clinical and clinical literature on Sabril^®.

     In the bioequivalence study, investigators randomized 30 healthy male and female subjects to either of two treatments — a 500 mg. tablet of Sabril^® or 500 mg. tablet of CPP-109. The researchers dispensed the assigned medication tablet to the participants after an overnight fast and collected blood plasma samples before dosing. An additional 21 blood plasma samples were collected after dosing over a period of 36 hours. After a washout period of eight days, each participant was crossed over to receive the alternate tablet, and plasma samples were collected according to the same schedule. A total of 28 subjects completed both arms of the study. This study was conducted as recommended by the Food and Drug Administration’s Guidance for Industry, “Bioavailability and Bioequivalence Studies for Orally Administered Drug Products — General Considerations.”

     Bioequivalence of the two tablet formulations is supported by the pharmacokinetic data collected for CPP-109 and Sabril^®. Specifically, the maximum plasma concentration and area under the curve for vigabatrin were similar for CPP-109 and Sabril^® Tablets. The 90% geometric confidence intervals attained for these pharmacokinetic parameters were well within the 80% to 125% range recommended by the Food and Drug Administration’s Guidance for Industry, “Statistical Approaches to Establishing Bioequivalence,” and the two products meet the requirements to be considered both bioavailable and bioequivalent.

     While the top-line results of our bioequivalence study were positive, and while we anticipate that the final results of the bioequivalence study will be positive, there can be no assurance that the final results of the bioequivalence study will be positive.

     A copy of our May 9, 2007 press release is Exhibit 99.1 to this Form 10-Q and is incorporated herein by this reference.

     On March 26, 2007, we entered into a lease for approximately 1,616 square feet of office space in a building located at 355 Alhambra Plaza in Coral Gables, Florida. The lease is for a 63 month term and we will pay base rent under the new lease of approximately $56,560 per annum. We expect to move into our new office facility in July 2007.

     We have retained Health Decisions, Inc. as the CRO to conduct our U.S. Phase II clinical trial to evaluate CPP-109 as a treatment for cocaine addiction. Under the agreement, we will pay the CRO approximately $3,700,000 over the next 15 months based on the achievement of milestones.

     We anticipate that our clinical trial will be a double-blind, randomized, placebo-controlled trial involving approximately 180 patients at multiple treatment sites in the United States and Canada. To be eligible to participate in the trial, participants will have to meet specific clinical standards for cocaine dependence, as specified in DSM-IV, a set of diagnosis guidelines established for clinical professionals. Additionally, trial participants cannot meet the DSM-IV criteria for dependence on other addictive substances. Further, eye safety studies will be conducted on all trial participants to determine the extent of visual field defects among such participants, if any.

     The treatment phase of the trial is expected to be 12 weeks in duration, with subjects randomly assigned into two equal groups. One group will receive CPP-109 and the second group will receive a placebo. The primary endpoint of the trial will be the proportion of subjects in each treatment group who are cocaine abstinent during the last two weeks of the treatment phase. Secondary endpoints include, among others, the maximum number of consecutive treatment phase cocaine non-use days. Subjects completing the treatment phase will be followed up for an additional 12 weeks to obtain additional information to support the safety and efficacy of CPP-109.

     We are a development stage company and have had no revenues to date. We will not have revenues until such time as we receive approval of an NDA for CPP-109 and successfully commercialize our product, of which there can be no assurance.

     Our research and development expenses consist of costs incurred for company-sponsored research and development activities. These expenses consist primarily of direct and research-related allocated overhead expenses such as facilities costs, material supply costs, and medical costs for visual field defect testing. It also includes both cash and stock-based compensation paid to our scientific advisors and consultants related to our product development efforts. To date, all of our research and development resources have been devoted to the development of CPP-109. We expect this to continue for the foreseeable future. Costs incurred in connection with research and development activities are expensed as incurred.

     Clinical trial activities require significant expenditures up front. We anticipate paying significant portions of a trial’s cost before it begins, and incurring additional expenditures as the trial progresses and reaches certain milestones.

     We do not currently have any selling or marketing expenses, as we have not yet received approval for the commercialization of CPP-109. We expect we will begin to incur such costs upon our filing of an NDA, so that we

     Our general and administrative expenses consist primarily of salaries, consulting fees and/or travel related expenses for certain employees, consultants, directors and members of our Scientific Advisory Board. Other costs include information technology, corporate administration functions, administrative facility costs, regulatory fees, and professional fees for legal and accounting services.

     We recognize costs related to the issuance of stock-based awards to employees and consultants by using the estimated fair value of the award at the date of grant, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS 123R”).

     We have incurred operating losses since inception. Our net deferred tax asset has a 100% valuation allowance as of March 31, 2007 and December 31, 2006, as we believe it is more likely than not that the deferred tax asset will not be realized. If an ownership change, as defined under Internal Revenue Code Section 382, occurs, the use of these carry-forwards may be subject to limitation.

     Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, our expected course of development, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

     The list below is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, or GAAP. There are also areas in which our management’s judgment in selecting any available alternative would not produce a materially different result. Our financial statements and the notes thereto included elsewhere in this report contain accounting policies and other disclosures required by GAAP.

     Research and development expenditures are charged to operations as incurred. Our expenses related to clinical trials are expected to be based on actual and estimated costs of the services received and efforts expended pursuant to contracts with multiple research institutions and the CRO that conducts and manages our clinical trials. The financial terms of these agreements are subject to negotiation and will vary from contract to contract and may result in uneven payment flows. Generally, it is anticipated that these agreements will set forth the scope of the work to be performed at a fixed fee or unit price. Payments under these contracts will depend on factors such as the successful enrollment of patients or the completion of clinical trial milestones. Expenses related to clinical trials generally are expected to be accrued based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we would be required to modify our estimates accordingly on a prospective basis.

     Effective January 1, 2006 we adopted the fair value recognition provisions of SFAS 123R, “Share-Based Payment”. We utilize the Black-Scholes option pricing model to determine the fair value of stock options on the date of grant. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. The Company’s expected volatility is based on the historical volatility of other publicly traded development stage companies in the same industry. The estimated expected option life is based upon estimated employee exercise patterns and considers whether and the extent to which the options are in-the-money. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate for the estimated expected life of the Company’s stock options awards. For the three month periods ended March 31, 2007 and 2006 the assumptions used were an estimated annual volatility of 100%, average expected holding periods of four to five years, and risk-free interest rates of 4.57% and 5.50%, respectively. The expected dividend rate is zero and no forfeiture rate was applied.

     Revenues. We had no revenues for the three month periods ended March 31, 2007 and 2006.

     Research and Development Expenses. Research and development expenses for the three months ended March 31, 2007 and 2006 were $762,520 and $162,615, respectively, including stock-based compensation expense in each of the three month periods of $78,393 and $82,068, respectively. The stock-based compensation is non-cash and relates to shares of common stock issued to several of our consultants and scientific advisors for services rendered and the expense of stock options awards and restricted stock awards to our employees, officers, directors and scientific advisors. During the first quarter of 2007 cash expenses for research and development grew significantly compared to amounts incurred in the first quarter of 2006. The increase primarily related to expenses for raw materials and finished products for use in our clinical trials, an unrestricted grant to the sponsor of a clinical trial that is being conducted in Mexico by a member of our scientific advisory board and our bioequivalence study comparing CPP-109 to the version of Sabril^®marketed in Europe by Sanofi-Aventis. These expenses totaled approximately $605,000 and $0, respectively for the three months ended March 31, 2007 and 2006.

     Selling and Marketing Expenses. We had no selling and marketing expenses during the three months ended March 31, 2007 and 2006. We anticipate that we will begin to incur sales and marketing expenses when we file an NDA for CPP-109, in order to develop a sales organization to market CPP-109 and other products we may develop upon the receipt of required approvals, of which there can be no assurance.

     General and Administrative Expenses. General and administrative expenses were $734,626 and $155,382, respectively, for the three months ended March 31, 2007 and 2006. These expenses include $121,975 and $38,495, respectively, in stock-based non-cash compensation expense relating to the vesting of stock options and restricted stock grants. General and administrative expenses increased substantially from period to period due to the addition of several executives in late 2006 and early 2007 who were not previously employees in the prior period and the expenses related to our being a publicly traded entity commencing in November 2006.

     General and administrative expenses includes among other expenses, office expenses, legal and accounting fees and travel expenses for our employees, consultants and members of our Scientific Advisory Board. We expect general and administrative efforts to further increase in future periods as we incur general non-research expenses relating to the monitoring and oversight of our clinical trials and otherwise expend funds to continue to develop our business as described herein and in our Annual Report on Form 10-K for 2006.

     Stock-Based Compensation. Total stock based compensation for the three months ended March 31, 2007 and 2006 was $200,368 and $120,563, respectively. As of March 31, 2007, we had outstanding stock options to purchase 2,458,149 shares of our common stock, of which options to purchase 2,243,672 shares were vested and options to purchase 214,477 shares were unvested. We also had 15,000 shares of restricted common stock granted as of March 31, 2007, none of which were vested at that date.

     Interest Income. We reported interest income in all periods relating to our investment of funds received from our private placements and IPO. Interest income increased substantially from period to period due to our investment in the 2007 first quarter of the proceeds of our IPO. All such funds were invested in short term interest bearing obligations, certificates of deposit and direct or guaranteed obligations of the United States government.

     Income taxes. We have incurred net operating losses since inception. In both the first quarter of 2007 and the first quarter of 2006 we have applied a 100% valuation allowance against our deferred tax asset as we believe that it is more likely than not that the deferred tax asset will not be realized.

     Since our inception, we have financed our operations primarily through the net proceeds of private placements of our equity securities and through our IPO. At March 31, 2007, we had cash and cash equivalents of $19.1 million and working capital of $18.8 million. At December 31, 2006 we had cash and cash equivalents of $20.4 million and working capital of $19.8 million.

     We have to date incurred operating losses, and we expect these losses to increase substantially in the future as we expand our product development programs and prepare for the commercialization of CPP-109. We anticipate using the net proceeds from our IPO to finance these activities. It may take several years to obtain the necessary regulatory approvals to commercialize CPP-109 in the United States.

     We believe that our available resources will be sufficient to meet our projected operating requirements for the next 24 months, including our requirements relating to obtaining necessary regulatory approvals of CPP-109 for use in treating cocaine addiction.

     Our future funding requirements will depend on many factors, including:

     If we do not have sufficient resources to fund our operations and product development plans, we may seek to raise additional funds through public or private equity offerings, debt financings, capital lease transactions, corporate collaborations or other means. We may seek to raise additional capital due to favorable market conditions or strategic considerations even if we have sufficient funds for planned operations. Any sale by us of additional equity or convertible debt securities could result in dilution to our stockholders.

     To the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our technologies or grant sublicenses on terms that are not favorable to us. We do not know whether additional funding will be available on acceptable terms, or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or sales and marketing initiatives.

     Net cash used in operations was $1,365,649 and $177,463, respectively, for the three months ended March 31, 2007 and 2006. During the three months ended March 31, 2007, net cash used in operating activities was primarily attributable to our net loss of $1,252,078 adjusted for $202,458 of non-cash expenses, decreases of $135,607 in accounts payable and $53,619 in accrued expenses, offset in part by an increase of $126,360 in prepaid expenses and deposits. Non-cash expenses included depreciation and stock-based compensation expense. During the three months ended March 31, 2006, net cash used in operating activities was primarily attributable to our net loss of $312,829 and a decrease in accounts payable of $8,467. These effects were partially offset by $121,136 of non-cash, primarily stock-based expenses, and an increase in accrued expenses and other liabilities of $25,093.

     Net cash used in investing activities was $4,113 and $6,309, respectively, for the three months ended March 31, 2007 and 2006. Such funds were used primarily to purchase computer equipment.

     No cash was provided by (used in) financing activities for the three months ended March 31, 2007 or 2006.

     As of March 31, 2007, we had contractual obligations as follows:

     We are also obligated to make the following payments:

     We currently have no debt and no capital leases. We have operating leases for our office facilities. We do not have any off-balance sheet arrangements as such term is defined in rules promulgated by the SEC.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). This statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS No. 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS No. 123(R) and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007. We are evaluating the impact of SFAS No. 157, but do not expect the adoption of SFAS No. 157 to have a material impact on our financial position, results of operations, or cash flows.

     In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS No. 159) “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS No. 159 will be effective for us beginning January 1, 2008. We are in the process of determining the effect, if any, the adoption of SFAS No. 159 will have on our financial statements.

     Market risk represents the risk of changes in the value of market risk-sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in our results of operations and cash flows.

     Our exposure to interest rate risk is currently confined to our cash that is invested in highly liquid money market funds. The primary objective of our investment activities is to preserve our capital to fund our product development activities and operations. We also seek to maximize income from our investments without assuming significant risk. We do not use derivative financial instruments in our investment portfolio. Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations.

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     Pursuant to the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.