HERON THERAPEUTICS, INC. /DE/ - Quarter Report: 2007 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X] Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the quarterly period ended September 30, 2007
OR
|
[ ]
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the transition period
from
to
Commission
File Number 0-16109
A.P.
PHARMA, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
94-2875566
|
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
|
of
incorporation)
|
Identification
No.)
|
|
123
Saginaw Drive
|
|
|
Redwood
City CA
|
94063
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(650)
366-2626
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
[X] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
|
Large
accelerated filer
|
[ ]
|
Accelerated
filer
|
[ ]
|
Non-accelerated
filer
|
[X]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.)
Yes
[ ] No
[X]
At
October 31, 2007, the number of outstanding shares of the Company's common
stock, par value $.01, was 30,779,798.
Table
of Contents
A.P.
Pharma, Inc
INDEX
|
Page
No.
|
||
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
Item
1.
|
Financial
Statements (unaudited):
|
|
|
Condensed
Balance Sheets as of September 30, 2007 and December 31,
2006
|
3
|
|
|
Condensed
Statements of Operations for the three and nine months ended September
30,
2007 and 2006
|
4
|
|
|
Condensed
Statements of Cash Flows for the nine months ended September 30,
2007 and
2006
|
5
|
|
|
Notes
to Condensed Financial Statements
|
6
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
12
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
14
|
|
Item
4.
|
Controls
and Procedures
|
14
|
|
PART
II.
|
OTHER
INFORMATION
|
14
|
|
Item
1A.
|
RISK
FACTORS
|
14
|
|
Item
5.
|
Other
Matters
|
14
|
|
Item
6.
|
Exhibits
|
15
|
|
Signatures
|
16
|
Part
I. Financial
Information
Item
1: Financial
Statements:
A.P.
Pharma, Inc.
Condensed
Balance Sheets
(in
thousands)
|
September
30, 2007
|
December
31, 2006
|
|||
|
(unaudited)
|
(Note
1)
|
|||
|
Assets
|
||||
|
Current
assets:
|
||||
|
Cash
and cash equivalents
|
$ 37,873
|
$ 2,333
|
||
|
Marketable
securities
|
1,916
|
13,189
|
||
|
Accounts
receivable
|
125
|
75
|
||
|
Prepaid
expenses and other current assets
|
853
|
609
|
||
|
Total
current assets
|
40,767
|
16,206
|
||
|
|
||||
|
Property
and equipment, net
|
794
|
958
|
||
|
Other
long-term assets
|
75
|
87
|
||
|
Total
assets
|
$ 41,636
|
$ 17,251
|
||
|
|
||||
|
Liabilities
and Stockholders' Equity
|
|
|||
|
Current
liabilities:
|
|
|||
|
Accounts
payable
|
$ 500
|
$ 772
|
||
|
Accrued
expenses
|
2,992
|
3,085
|
||
|
Accrued
disposition costs
|
66
|
335
|
||
|
Total
current liabilities
|
3,558
|
4,192
|
||
|
Deferred
revenue
|
1,000
|
1,000
|
||
|
Total
liabilities
|
4,558
|
5,192
|
||
|
|
||||
|
Stockholders'
equity:
|
|
|||
|
Common
stock
|
137,325
|
99,835
|
||
|
Accumulated
deficit
|
(100,226)
|
(87,763)
|
||
|
Accumulated
other comprehensive loss
|
(21)
|
(13)
|
||
|
Total
stockholders' equity
|
37,078
|
12,059
|
||
|
Total
liabilities and stockholders' equity
|
$ 41,636
|
$ 17,251
|
||
|
|
||||
|
See
accompanying notes to condensed financial statements.
|
|
|||
A.P.
Pharma, Inc.
Condensed
Statements of Operations (unaudited)
(in
thousands, except per share amounts)
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||||||
|
2007
|
2006
|
2007
|
2006
|
||||
|
Contract
revenue
|
$ 121
|
$ -
|
$ 280
|
$ -
|
|||
|
Operating
expenses:
|
|||||||
|
Research
and development
|
4,595
|
3,118
|
13,344
|
10,443
|
|||
|
General
and administrative
|
762
|
830
|
2,753
|
2,695
|
|||
|
Total
operating expenses
|
5,357
|
3,948
|
16,097
|
13,138
|
|||
|
Operating
loss
|
(5,236)
|
(3,948)
|
(15,817)
|
(13,138)
|
|||
|
Interest
income, net
|
561
|
244
|
865
|
786
|
|||
|
Gain
on sale of interest in royalties
|
-
|
-
|
2,500
|
23,429
|
|||
|
Other
income (expense), net
|
(3)
|
(49)
|
1
|
(53)
|
|||
|
Income
(loss) from continuing operations
|
(4,678)
|
(3,753)
|
(12,451)
|
11,024
|
|||
|
Income
(loss) from discontinued operations
|
1
|
(64)
|
33
|
(92)
|
|||
|
Income
(loss) before income taxes
|
(4,677)
|
(3,817)
|
(12,418)
|
10,932
|
|||
|
Tax
provision
|
(8)
|
-
|
(44)
|
-
|
|||
|
Net
income (loss)
|
$ (4,685)
|
$ (3,817)
|
$ (12,462)
|
$ 10,932
|
|||
|
Basic
income (loss) per share:
|
|||||||
|
Income
(loss) from continuing operations
|
$ (0.15)
|
$ (0.59)
|
$ (.80)
|
$ 1.75
|
|||
|
Net
income (loss)
|
$ (0.15)
|
$ (0.60)
|
$ (.80)
|
$ 1.73
|
|||
|
Diluted
income (loss) per share:
|
|||||||
|
Income
(loss) from continuing operations
|
$ (0.15)
|
$ (0.59)
|
$ (.80)
|
$ 1.73
|
|||
|
Net
income (loss)
|
$ (0.15)
|
$ (0.60)
|
$ (.80)
|
$ 1.72
|
|||
|
Weighted
average common shares
|
|||||||
|
Outstanding-basic
|
30,736
|
6,319
|
15,553
|
6,312
|
|||
|
Weighted
average common shares
|
|||||||
|
Outstanding-diluted
|
30,736
|
6,319
|
15,553
|
6,359
|
|||
|
See
accompanying notes to condensed financial statements.
|
|||||||
A.P.
Pharma, Inc.
Condensed
Statements of Cash Flows (unaudited)
(in
thousands)
|
Nine
Months Ended September 30,
|
||||
|
2007
|
2006
|
|||
|
Cash
flows from operating activities:
|
||||
|
Net
income (loss)
|
$ (12,462)
|
$ 10,932
|
||
|
Adjustments
to reconcile net income (loss) to net
|
||||
|
cash
provided by (used in) operating activities:
|
||||
|
Loss
(gain) from discontinued operations
|
(33)
|
92
|
||
|
Loss
on sale of marketable securities
|
-
|
1
|
||
|
Depreciation
and amortization
|
271
|
299
|
||
|
Stock-based
compensation expense
|
253
|
357
|
||
|
Amortization
of discount and accretion of premium
|
||||
|
on
marketable securities
|
(70)
|
(22)
|
||
|
Changes
in operating assets and liabilities:
|
||||
|
Accounts
receivable
|
(104)
|
1,388
|
||
|
Prepaid
expenses and other current assets
|
(244)
|
(423)
|
||
|
Other
long-term assets
|
17
|
56
|
||
|
Accounts
payable
|
(272)
|
(257)
|
||
|
Accrued
expenses
|
(93)
|
(117)
|
||
|
Net
cash provided by (used in) continuing operating activities
|
(12,737)
|
12,306
|
||
|
Net
cash used in discontinued operations
|
(186)
|
(11)
|
||
|
Cash
flows from investing activities:
|
||||
|
Purchases
of property and equipment
|
(108)
|
(88)
|
||
|
Purchases
of marketable securities
|
-
|
(14,701)
|
||
|
Maturities
of marketable securities
|
4,875
|
1,800
|
||
|
Sales
of marketable securities
|
6,460
|
3,628
|
||
|
Net
cash provided by (used in) investing activities
|
11,227
|
(9,361)
|
||
|
Cash
flows from financing activities:
|
||||
|
Proceeds
from issuance of common stock, net of issuance cost
|
37,198
|
-
|
||
|
Proceeds
from the exercise of stock options
|
-
|
11
|
||
|
Proceeds
from issuance of shares under
|
||||
|
Employee
Stock Purchase Plan
|
38
|
34
|
||
|
Net
cash provided by financing activities
|
37,236
|
45
|
||
|
Net
increase in cash and cash equivalents
|
35,540
|
2,979
|
||
|
Cash
and cash equivalents, beginning of the period
|
2,333
|
790
|
||
|
Cash
and cash equivalents, end of the period
|
$ 37,873
|
$ 3,769
|
||
|
See
accompanying notes to condensed financial statements.
|
||||
A.P.
Pharma, Inc.
Notes
to Condensed Financial Statements
September
30, 2007 and 2006 (unaudited)
(1) BUSINESS
AND BASIS OF PRESENTATION
A.P.
Pharma, Inc. (the “Company”, “we”, “our”, or “us”) is a specialty pharmaceutical
company focused on developing pharmaceutical products using our proprietary
Biochronomer polymer-based drug delivery technology. Our product development
philosophy is based on incorporating approved therapeutics into our proprietary
bioerodible drug delivery technology to create controlled release
pharmaceuticals to improve treatments for diseases or conditions. Our
lead product candidate, APF530, is currently in a pivotal Phase III clinical
trial for the prevention of acute and delayed onset chemotherapy-induced
nausea
and vomiting, or CINV.
Our
primary focus is to advance our proprietary Biochronomer technology, consisting
of bioerodible polymers designed to release drugs over a defined period.
We have
completed over 100 in vivo and in vitro studies demonstrating that our
Biochronomer technology is potentially applicable to a range of therapeutic
areas, including prevention of nausea and vomiting, pain management, control
of
inflammation and treatment of ophthalmic diseases. We have also completed
comprehensive animal and human toxicology studies that have established that
our
Biochronomer polymers are safe and well tolerated. Furthermore, our Biochronomer
technology can be designed to deliver drugs over periods varying from days
to
several months.
The
accompanying unaudited condensed financial statements have been prepared
in
accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for
interim financial information and with the instructions to Form 10-Q and
Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. GAAP for complete financial
statements. All adjustments (all of which are of a normal recurring
nature) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended
September 30, 2007 are not indicative of the results that may be expected
for
the year ending December 31, 2007 or for any other period. The
condensed balance sheet as of December 31, 2006 has been derived from the
audited financial statements as of that date but it does not include all
of the
information and notes required by U.S. GAAP. These condensed
financial statements and the notes thereto should be read in conjunction
with
the audited financial statements and notes thereto included in our Annual
Report
on Form 10-K for the year ended December 31, 2006 filed with the Securities
and
Exchange Commission (the “SEC”) on March 30, 2007 (our “2006
10-K”).
Summary
of Significant Accounting Policies
Use
of Estimates
The
preparation of our financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported
in
our financial statements and accompanying notes. Estimates were made
relating to useful lives of fixed assets, valuation allowances, impairment
of
assets, accrued clinical and preclinical expenses, and assumptions for valuing
options and other stock-based compensation. Actual results could
differ materially from those estimates.
Revenue
Recognition
Our
revenue arrangements with multiple deliverables are divided into separate
units
of accounting if certain criteria are met, including whether the delivered
element has stand-alone value to the customer and whether there is objective
and
reliable evidence of the fair value of the undelivered elements. The
consideration we receive is allocated among the separate units based on their
respective fair values, and the applicable revenue recognition criteria are
considered separately for each of the separate units. Advance
payments received in excess of amounts earned are classified as deferred
revenue
until earned.
Royalties
Royalties
from licensees are based on third-party sales of licensed products or
technologies and recorded as earned in accordance with contract terms when
third-party results can be reliably determined and collectability is reasonably
assured.
Generally,
contractually required minimum royalties are recorded ratably throughout
the
contractual period. Royalties in excess of minimum royalties are
recognized as earned when the related product is shipped to the end customer
by
our licensees based on information provided to us by our
licensees. No such royalties were recorded in any period
presented.
License
Fees
Licensing
agreements generally provide for periodic minimum payments, royalties, and/or
non-refundable license fees. These licensing agreements typically
require a non-refundable license fee and allow partners to sell our proprietary
products in a defined field or territory for a defined
period. License agreements provide for the Company to earn future
revenue through royalty payments. These non-refundable license fees
are initially reported as deferred revenue and recognized as revenue over
the
estimated life of the product to which they relate as we have continuing
involvement with licensees until the related product is discontinued or the
related patents expire, whichever is earlier. Revenue recognized from
deferred license fees is classified as license fees in the accompanying
statements of operations. License fees received in connection with
arrangements where we have no continuing involvement are recognized as license
fees when the amounts are received or when collectability is reasonably assured,
whichever is earlier. No such fees were recorded in any period
presented.
A
milestone payment is a payment made by a third party or corporate partner
to us
upon the achievement of a predetermined milestone as defined in a legally
binding contract. Milestone payments relating to licensing agreements
are recognized as license fees when the milestone event has occurred and
we have
completed all milestone related services such that the milestone payment
is
currently due and is non-refundable. No milestone payment relating to
licensing agreements was recorded in any period presented.
Contract
Revenue
Contract
revenue relates to research and development arrangements that generally provide
for the Company to invoice research and development fees based on full-time
equivalent hours for each project. Revenue from these arrangements are
recognized as the related development services are rendered. This
revenue approximates the costs incurred. For the three and nine
months ended September 30, 2007, we recorded contract revenue of $121,000
and
$280,000 respectively. There were no contract revenue recorded for
the three and nine months ended September 30, 2006.
Sale
of Royalty Revenue
In
January 2006, we completed the sale of our rights to royalties on sales of
Retin-A Micro® and Carac® for up to $30 million. We received proceeds of $25
million upon the closing of the transaction and received a $2.5 million
milestone payment in June 2007. We may receive up to an additional $2.5 million
based on the satisfaction of certain predetermined milestones. The royalty
interest agreement was entered into by the parties in January 2006, but the
effective date of the sale of the royalty interest was October 1, 2005. The
royalties recognized by the Company from October 1, 2005 through December
31,
2005 were accounted for as an offset against the $25 million gain.
Cash
Equivalents and Short-term Investments
We
consider all short-term investments in debt securities which have original
maturities of less than three months at date of purchase to be cash
equivalents. Investments which have original maturities of three
months or longer are classified as marketable securities in the accompanying
condensed balance sheets. Marketable securities are classified as
available for sale at the time of purchase and carried at fair
value. Unrealized gains or losses, if any, are recorded as other
comprehensive income or loss in stockholders’ equity. Our marketable
securities at September 30, 2007 include certain debt securities with remaining
maturities of less than 6 months.
We
invest
excess cash in a variety of high grade short-term, interest-bearing
securities. The fair value of these investments approximate their
cost at September 30, 2007.
Segment
and Geographic Information
Our
operations are confined to a single business segment, the design and
commercialization of polymer technologies for pharmaceutical and other
applications. Substantially all of our revenue have been derived from
domestic customers.
Stock-Based
Compensation
On
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123R, “Share-Based Payment” (SFAS 123R). Under SFAS
123R we measure and recognize compensation expense for all employee and
non-employee share-based payments at fair value over the service period
underlying the arrangement. The fair value of options was estimated
at the date of grant using the Black-Scholes option pricing model. The
assumptions used for the three and nine months ended September 30, 2007 and
2006
are as follows:
|
Three
Months
|
Nine
months
|
|||||||||||||||
|
Ended
September 30,
|
Ended
September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Employee
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
Volatility
factor
|
|
|
240
|
%
|
240
|
%
|
240
|
%
|
240
|
%
|
||||||
|
Risk-free
interest rate
|
|
|
4.1
|
%
|
5.0
|
%
|
4.6
|
%
|
4.8
|
%
|
||||||
|
Expected
life (years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
|
Forfeiture
|
|
38.1
|
%
|
4.2
|
%
|
14.9
|
%
|
3.5
|
%
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
Volatility
factor
|
|
|
67
|
%
|
71
|
%
|
72
|
%
|
83
|
%
|
||||||
|
Risk-free
interest rate
|
|
|
4.8
|
%
|
5.0
|
%
|
4.8
|
%
|
4.4
|
%
|
||||||
|
Expected
life (years)
|
|
|
1.25
|
|
|
|
1.25
|
|
|
|
1.25
|
|
|
|
1.25
|
|
The
following table shows the stock-based compensation expense (credit) for all
awards (in thousands except per share amount):
|
Three
Months
|
Nine
months
|
|||||||||||||||
|
Ended
September 30,
|
Ended
September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Operating
expenses:
|
|
|
|
|
|
|
|
|||||||||
|
Research
and development
|
$
|
(31)
|
$
|
31
|
$
|
73
|
$
|
110
|
|
|||||||
|
General
and administrative
|
8
|
61
|
180
|
247
|
|
|||||||||||
|
Total
stock-based compensation expense (credit)
|
$
|
(23)
|
$
|
92
|
$
|
253
|
$
|
357
|
|
|||||||
|
Impact
on basic and diluted net income (loss) per common share
|
*
|
$
|
(0.01)
|
$
|
(0.02)
|
$
|
(0.06)
|
|||||||||
*
Impact
on basic and diluted net loss per common share was less than $0.01 per
share.
There
was
no capitalized stock-based employee compensation cost as of September 30,
2007. Since the Company had cumulative net losses as of September 30, 2007,
there was no recognized tax benefit associated with stock-based compensation
expense.
During
the three months ended September 30, 2007 we granted 5,000 options to one
employee to purchase our common stock. The following table summarizes
option activity for the nine months ended September 30, 2007:
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
||||
|
Outstanding
at January 1, 2007
|
547,305
|
$ 10.68
|
|||||
|
Granted
|
46,250
|
$ 5.12
|
|||||
|
Expired
and Forfeited
|
(3,356)
|
$ 6.68
|
|||||
|
Outstanding
at March 31, 2007
|
590,199
|
$ 10.28
|
5.79
|
$ 5,133
|
|||
|
Granted
|
12,500
|
$ 3.00
|
|||||
|
Expired
and Forfeited
|
(60,610)
|
$ 16.06
|
|||||
|
Outstanding
at June 30, 2007
|
542,089
|
$ 9.26
|
5.85
|
$ -
|
|||
|
Granted
|
5,000
|
$ 2.10
|
|||||
|
Expired
and Forfeited
|
(24,961)
|
$ 16.09
|
|||||
|
Outstanding
at September 30, 2007
|
522,128
|
$ 8.96
|
5.71
|
$ -
|
|||
|
Options
exercisable at September 30, 2007
|
401,685
|
$ 10.12
|
4.74
|
$ -
|
As
of
September 30, 2007 there was approximately $340,000 of total unrecognized
compensation expense for all awards. This expense is expected to be
recognized over a weighted-average period of 2.47 years.
Recent
Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109 (“FIN 48”), which provides
clarification related to the process associated with accounting for uncertain
tax positions recognized in consolidated financial statements. FIN 48
prescribes a more-likely-than-not threshold for financial statement recognition
and measurement of a tax position taken, or expected to be taken, in a tax
return. FIN 48 also provides guidance related to, among other things,
classification, accounting for interest and penalties associated with tax
positions, and disclosure requirements. We adopted FIN 48 on January
1, 2007 and the impact on our financial statements was not
material.
In
September 2006, the FASB issued FASB Statement (“SFAS”) No. 157, Fair Value
Measurement, (“SFAS 157”). SFAS 157 provides enhanced guidance for using
fair value to measure assets and liabilities. The guidance clarifies
the principle for assessing fair value based on the assumptions market
participants would use when pricing the asset or liability. In
support of this principle, the guidance establishes a fair value hierarchy
that
prioritizes the information used to develop those assumptions. The fair value
hierarchy gives the highest priority to quoted prices in active markets and
the
lowest priority to unobservable data such as companies’ own
data. Under this guidance, fair value measurements would be
separately disclosed by level within the fair value hierarchy. SFAS
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal
years. The Company is currently evaluating SFAS 157 and expects to
adopt this guidance beginning on January 1, 2008.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS No.
159”). SFAS No. 159 expands opportunities to use fair value
measurement in financial reporting and permits entities to choose to measure
many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. We have not decided if we will choose to measure
any eligible financial assets and liabilities at fair value.
On
June
27, 2007, the EITF 07-3“Accounting for Advance Payments for Goods and
Services to be Received for Use in Future Research and Development
Activities,” was ratified which requires companies to defer and capitalize
prepaid nonrefundable research and development payments to third parties
over
the period that the research and development activities are performed or
the
services are provided, subject to an assessment of recoverability. The guidance
is effective for new contracts entered into in fiscal years beginning after
December 15, 2007, including interim periods within those fiscal years. As
required by EITF 07-3, companies should report the effects of applying the
consensus prospectively for new contracts entered into on or after the effective
date of this issue.
(2) INCOME
(LOSS) PER SHARE INFORMATION
Basic
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Because the
Company is in a net loss position for the three months ended September 30,
2007
and 2006 and nine months ended September 30, 2007, diluted loss per share
is
also calculated using the weighted average number of common shares outstanding
excluding the effect of potentially dilutive securities because they are
antidilutive. Such potentially dilutive securities at September 30,
2007 include outstanding stock options for 522,128 common shares and unearned
restricted stock awards for 33,750 common shares. For the nine months
ended September 30, 2006, diluted earnings per share is calculated using
the
weighted average number of common shares outstanding and other dilutive
securities.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations for the nine months ended September
30, 2006 (in thousands):
|
Numerator:
|
|
|
Net
income
|
$ 10,932
|
|
Denominator:
|
|
|
Weighted
average shares outstanding used to compute
|
|
|
Basic
earnings per share
|
6,312
|
|
Effect
of dilutive stock options and restricted stock awards
|
47
|
|
Weighted
average shares outstanding and dilutive
|
|
|
securities
used to compute diluted earnings per share
|
6,359
|
(3) COMPREHENSIVE
INCOME (LOSS)
Comprehensive
income (loss) for the three and nine months ended September 30, 2007 and
2006
consists of the following (in thousands):
|
Three
Months Ended
September
30,
|
Nine
months Ended
September
30,
|
||||||
|
2007
|
2006
|
2007
|
2006
|
||||
|
Net
income (loss)
|
$ (4,685)
|
$ (3,817)
|
$ (12,462)
|
$ 10,932
|
|||
|
Unrealized
gains (losses) on available-for-sale
|
|||||||
|
marketable
securities
|
(20)
|
33
|
(8)
|
(9)
|
|||
|
Comprehensive
income (loss)
|
$ (4,705)
|
$ (3,784)
|
$ (12,470)
|
$ 10,923
|
|||
(4) INCOME
TAXES
We
adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,
or FIN 48, on January 1, 2007. Upon adoption of FIN 48, we commenced
a review of our tax positions taken in our tax returns that remain subject
to
examination. Based upon our review, we do not believe we have any
unrecognized tax benefits or that there is material impact on our financial
condition or results of operations as a result of implementing FIN
48.
We
file
income tax returns in the U.S. federal jurisdiction and various state
jurisdictions. We are subject to U.S. federal or state income tax
examinations by tax authorities for all years in which we reported net operating
loss carry forwards. We do not believe there will be any material
changes in our unrecognized tax positions over the next 12 months.
We
recognize interest and penalties accrued on any unrecognized tax benefits
as a
component of income tax expense. As of the date of adoption of FIN
48, we did not have any accrued interest or penalties associated with any
unrecognized tax benefits, nor was any related interest expense recognized
for
the period ended September 30, 2007.
(5) STOCKHOLDERS’
EQUITY
On
May
25, 2007, we effected a one-for-four reverse stock split based on our
stockholders’ approval of such action at the annual stockholder meeting held on
May 23, 2007. All share and per share amounts for all periods presented have
been retroactively adjusted to reflect the reverse stock split.
On
June
19, 2007, we sold 24,393,939 shares of common stock at a price of $1.65 per
share, for net proceeds of approximately $37.2 million after deducting placement
agent fees and costs associated with the offering. The shares were offered
under
our registration statement on Form S-1, as amended (Registration No.
333-14-1918).
During
the nine months ended September 30, 2007, 11,254 shares of common stock were
issued to employees under the employee stock purchase plan and 15,000 shares
of
restricted common stock were awarded to directors.
(6) DISCONTINUED
OPERATIONS
We
completed the sale of certain assets of our Analytical Standards division
as
well as certain technology rights for our topical pharmaceutical and
cosmeceutical product lines and other assets ("cosmeceutical and toiletry
business") in February 2003 and July 2000, respectively.
The
Analytical Standards division and cosmeceutical and toiletry business are
reported as discontinued operations for all periods presented in the
accompanying Condensed Statements of Operations.
Income
(loss) from discontinued operations represents the income (loss) attributable
to
our Analytical Standards division that was sold to GFS Chemicals on February
13,
2003, and changes in estimates for our cosmeceutical and toiletry business
that
was sold to RP Scherer on July 25, 2000, as follows (in thousands):
|
Three
Months Ended
September
30,
|
Nine
months Ended
September
30,
|
||||||
|
2007
|
2006
|
2007
|
2006
|
||||
|
Analytical
Standards Division
|
|||||||
|
Royalties
earned in excess of minimum amount recorded
|
$ 1
|
$ 16
|
$ 18
|
$ 38
|
|||
|
Cosmeceutical
and Toiletry Business
|
|||||||
|
Change
in estimates for gross profit guarantees
|
-
|
(80)
|
15
|
(130)
|
|||
|
Total
income (loss) from discontinued operations
|
$ 1
|
$ (64)
|
$ 33
|
$ (92)
|
|||
|
Impact
on basic and diluted income (loss) per share
|
*
|
$ 0.01
|
*
|
$ 0.01
|
|||
*
Impact
on basic and diluted loss per common share from discontinued operations was
less
than $0.01 per share.
Liabilities
related to the discontinued operations at September 30, 2007 in the amount
of
$66,000 include severance costs and accruals for gross profit
guarantees. These liabilities are reported as accrued disposition
costs in the accompanying condensed balance sheets.
Under
the
terms of the agreement with RP Scherer, we guaranteed a minimum gross profit
percentage on RP Scherer's combined sales of products to Ortho Neutrogena
and
Dermik ("Gross Profit Guaranty"). The guaranty period commenced on
July 1, 2000 and ends on the earlier of July 1, 2010 or the end of two
consecutive guaranty periods where the combined gross profit on sales to
Ortho
and Dermik equals or exceeds the guaranteed gross profit. Effective
March of 2007, in conjunction with a sale of assets by RP Scherer’s successor
company to an Amcol International subsidiary (“Amcol”), a new agreement was
signed between us and Amcol to provide continuity of product supply to Ortho
and
Dermik. This new agreement potentially extends the gross profit
guaranty period an additional three years to July 1, 2013 unless it is
terminated earlier via the two period test. We expect the annual
Gross Profit Guaranty payments to range from approximately $100,000 to $150,000
for the remainder of the guaranty period. As the minimum amount of
Gross Profit Guaranty due is based on sales by RP Scherer and cannot be
estimated, no accrual has been recorded relating to sales in future
periods.
Cash
used
in discontinued operations primarily relates to royalty payments received
from
GFS Chemicals for the sale of certain products offset by a payment of $252,000
relating to the Gross Profit Guaranty.
Below
is
a summary of activity for liabilities related to the discontinued operations
for
the nine months ended September 30, 2007 (in thousands):
|
Accrual
at December 31, 2006
|
$ 335
|
|
Adjustment
for gross profit guaranty accrual
|
(14)
|
|
Payment
for gross profit guaranty
|
(252)
|
|
Payment
under severance agreement
|
(3)
|
|
Accrual
at September 30, 2007
|
$ 66
|
ITEM
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-looking
Statements
This
Form
10-Q contains "forward-looking statements" as defined by the Private Securities
Reform Act of 1995. These forward-looking statements involve risks
and uncertainties including uncertainties associated with timely development,
approval, launch and acceptance of new products, satisfactory completion
of
clinical studies, establishment of new corporate alliances, progress in research
and development programs and other risks and uncertainties identified in
the
Company's filings with the Securities and Exchange Commission. We
caution investors that forward-looking statements reflect our analysis only
on
their stated date. We do not intend to update them except as required
by law.
Critical
Accounting Policies and Estimates
We
believe that there have been no significant changes in our critical accounting
policies during the nine months ended September 30, 2007 as compared to those
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2006.
Results
of Operations for the Three and Nine months Ended September 30, 2007 and
2006
(in thousands unless otherwise indicated)
Contract
revenue, which is derived from work performed under collaborative research
and
development arrangements, increased $121 and $280 in the three and nine months
ended September 30, 2007, respectively. The amount of contract
revenue varies from period to period depending on the level of activity
requested of us by our collaborators. Therefore, we cannot predict
the amount of contract revenue in future periods.
Our
revenue has been derived principally from contract revenue. In
January 2006, we completed the sale of our rights to royalties on sales of
Retin-A Micro® and Carac® for up to $30 million. We received proceeds of $25
million upon the closing of the transaction and received a $2.5 million
milestone payment in June 2007 which were recorded as gain on sale of interest
in royalties. We may receive up to an additional $2.5 million based on the
satisfaction of certain predetermined milestones. The royalty interest agreement
was entered into by the parties in January 2006, but the effective date of
the
sale of the royalty interest was October 1, 2005. The royalties recognized
by
the Company from October 1, 2005 through December 31, 2005 were accounted
for as
an offset against the $25 million gain. As a result of this transaction,
there
were no royalties for the third quarter of 2007 and 2006. We will not
record additional royalty revenue on sales of Retin-A Micro® and Carac® in
future periods.
Research
and development expense for the three months ended September 30, 2007 increased
by $1,477 from $3,118 for the three months ended September 30, 2006 to $4,595
due mainly to increased expenditures on our Phase 3 study for APF530, our
product candidate for the prevention of chemotherapy-induced nausea and
vomiting. Research and development expense for the nine months ended September
30, 2007 increased by $2,901 from $10,443 for the nine months ended September
30, 2006 to $13,344 due mainly to increased expenditures on our Phase
3 study for APF530. We expect research and development expense to increase
in
the last quarter of 2007 reflecting the increased number of patients enrolled
in
our Phase 3 study for APF530 together with the costs associated with the
renewed
development and clinical programs for other product candidates.
General
and administrative expense decreased for the three months ended September
30,
2007 by $68 from $830 for the three months ended September 30, 2006 to $762
due
primarily to decreased outside consultant fees. General and
administrative expense for the nine months ended September 30, 2007 increased
by
$58 from $2,695 for the nine months ended September 30, 2006 to $2,753 due
mainly to increased legal fees. We expect general and administrative expense
in
the last quarter of 2007 to remain relatively constant with the first three
quarters of the year.
We
expect
our non-cash operating expenses for employee share-based compensation for
the
last quarter of 2007 to remain relatively constant with the first three quarters
of the year.
Net
interest income increased for the three months ended September 30, 2007 by
$317
to $561 from $244 for the three months ended September 30, 2006 and increased
for the nine months ended September 30, 2007 by $79 to $865 from $786 for
the
nine months ended September 30, 2006 due to higher average balance of cash,
cash
equivalents and marketable securities.
Income/loss
from discontinued operations represents the net income/loss attributable
to the
Analytical Standards division which was sold to GFS Chemicals, Inc. in February
2003 and the cosmeceutical and toiletries business which was sold to RP Scherer
Corporation in July 2000. Net income from discontinued operations
totaled $1 for the three months ended September 30, 2007, compared with a
net
loss of $64 in the three months ended September 30, 2006. For the nine months
ended September 30, 2007, net income from discontinued operations totaled
$33
compared with a net loss of $92 in the nine months ended September 30,
2006.
Capital
Resources and Liquidity
Cash,
cash equivalents and marketable securities increased by $25 million to $40
million at September 30, 2007 from $15 million at December 31, 2006 due
primarily to the sale of 24,393,939 shares of common stock in an underwritten
public offering in June 2007 at a price of $1.65 per share for net proceeds
of
approximately $37.2 million less the cash used in continuing operating
activities since that date.
Net
cash
used in continuing operating activities for the nine months ended September
30,
2007 was $12 million, compared to net cash of $12 million provided by continuing
operating activities for the nine months ended September 30,
2006. The decrease in net cash provided by operating activities from
2006 to 2007 was mainly due to the one-time payment from the sale of our
interest in royalties in January 2006.
Net
cash
provided by investing activities for the nine months ended September 30,
2007
was $11 million, compared to net cash of $9 million used in investing activities
for the nine months ended September 30, 2006. The decrease in the cash used
in
investing activities was primarily due to the purchases of $15 million of
marketable securities in the nine months ended September 30, 2006.
To
date,
we have financed our operations including technology and product research
and
development through the sale of common stock in June 2004 and 2007, royalties
received on sales of Retin-A Micro® and Carac®, income from collaborative
research and development fees, the proceeds received from the sales of our
Analytical Standards division and our cosmeceutical and toiletry business,
interest earned on short-term investments and the sale of our interest in
the
royalty income from Retin-A Micro® and Carac®. Our existing cash, cash
equivalents and marketable securities, together with interest income will
be
sufficient to meet our cash needs for at least one year.
Our
future capital requirements will depend on numerous factors including, among
others, our ability to enter into collaborative research and development
and
licensing agreements; progress of product candidates in preclinical and clinical
trials; investment in new research and development programs; time required
to
gain regulatory approvals; resources that we devote to self-funded products;
potential acquisitions of technology, product candidates or businesses; and
the
costs of defending or prosecuting any patent opposition or litigation necessary
to protect our proprietary technology.
Below
is
a summary of fixed payments related to certain contractual obligations (in
thousands). This table excludes amounts already recorded on our
condensed balance sheet as current liabilities at September 30,
2007.
|
Total
|
Less
than
1
year
|
2
to 3
years
|
4
to 5
years
|
More
than
5
years
|
|||||
|
Operating
Leases
|
$ 1,907
|
$ 545
|
$ 1,096
|
$ 266
|
$ -
|
ITEM
3. Quantitative and Qualitative Disclosure about Market
Risk
Since
December 31, 2006, there have been no material changes in the Company's market
risk exposure.
ITEM
4. Controls and Procedures
Evaluation
of disclosure controls and procedures: We carried out an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of
the design and operations of our disclosure controls and procedures pursuant
to
Rule 13a-15(e) and 15(d)-15(e) of the Exchange Act. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that as of September 30, 2007, the end of period covered by this report,
our
disclosure controls and procedures were effective at the reasonable assurance
level to alert them in a timely manner to material information relating to
the
Company required to be included in our Exchange Act filings.
Changes
in internal controls: During the three months ended September 30,
2007, there have been no significant changes in our internal control over
financial reporting that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART
II. OTHER
INFORMATION
ITEM
1A. Risk
Factors
There
have been no material changes to the risk factors set forth in the "RISK
FACTORS" section of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006.
ITEM
5. Other Matters
In
March
2005 we entered into an amended and restated retention and non-competition
agreement with Mr. O’Connell and a change of control agreement with Dr. Barr.
Mr. O’Connell’s agreement was amended twice in 2007, most recently in August
2007, without affecting any of its economic provisions, to conform with the
newly-promulgated technical provisions of the Treasury Regulations under
Section
409A of the Internal Revenue Code. Dr. Barr’s agreement was amended on November
8, 2007 to become a management retention agreement. This amended agreement
provides that if Dr. Barr’s employment is terminated by us without good cause or
by him for good reason, as such terms are defined in his agreement, he shall
receive his annual base salary in effect on the date of termination, the
average
of any bonus paid during each of the three 12-month periods prior to
termination, and the continued vesting of his unvested stock options, all
for a
12-month period following such termination, and the lapse of all remaining
forfeiture and transfer restrictions on restricted stock previously granted
to
him. Such salary and bonus payments shall be paid in twelve equal monthly
increments. In addition, upon a change of control, all of his unvested stock
options shall immediately vest, and all restrictions on his restricted stock
shall lapse.
ITEM
6. Exhibits
Exhibit
31.1 Certification of Chief Executive Officer pursuant to Rules 13A-15(e)
Promulgated under the Securities Exchange Act of 1934 as amended.
Exhibit
31.2 Certification of Chief Financial Officer pursuant to Rules 13A-15(e)
Promulgated under the Securities Exchange Act of 1934 as amended.
Exhibit
32 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002.
Exhibit
10.14* Amended & Restated Retention and Non-Competition Agreement with
Michael O’Connell effective August 23, 2007.
Exhibit
10.15* Management Retention Agreement with Dr. John Barr effective November
8,
2007.
Exhibit
10.16* Amendments to Advanced Polymer Systems, Inc. Non-Qualified Stock Option
Plan
___________
* Previously
filed
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
A.P.
PHARMA, INC.
|
||
|
Date:
November 13, 2007
|
/S/
Gregory Turnbull
|
|
|
Gregory
Turnbull
|
||
|
President
and Chief Executive Officer
|
||
|
Date:
November 13, 2007
|
/S/
Michael O’Connell
|
|
|
Michael
O’Connell
|
||
|
Chief
Operating Officer and Chief Financial
Officer
|