HERON THERAPEUTICS, INC. /DE/ - Quarter Report: 2008 June (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 June 30, 2008
OR
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[ ]
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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For
the transition period
from
to
Commission
File Number 001-33221
A.P.
PHARMA, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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94-2875566
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(State
or other jurisdiction
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(I.R.S.
Employer
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of
incorporation)
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Identification
No.)
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123
Saginaw Drive
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Redwood
City CA
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94063
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(Address
of principal executive offices)
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(Zip
Code)
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(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, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer” ,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one).
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Large
accelerated filer
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[ ]
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Accelerated
filer
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[ ]
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Non-accelerated
filer
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[ ]
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Small
Reporting Company
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[X]
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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
July
31, 2008, the number of outstanding shares of the Company's common stock, par
value $.01, was 30,891,465.
A.P.
Pharma, Inc
INDEX
Item
1: Financial
Statements:
A.P.
Pharma, Inc.
Condensed
Balance Sheets
(in
thousands)
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June
30, 2008
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December
31, 2007
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|||||||
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(unaudited)
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(Note
1)
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|||||||
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Assets
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||||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$ | 20,356 | $ | 33,510 | ||||
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Marketable
securities
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1,164 | 1,552 | ||||||
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Accounts
receivable
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152 | 152 | ||||||
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Prepaid
expenses and other current assets
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489 | 582 | ||||||
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Total
current assets
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22,161 | 35,796 | ||||||
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Property
and equipment, net
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1,163 | 1,079 | ||||||
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Other
long-term assets
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103 | 75 | ||||||
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Total
assets
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$ | 23,427 | $ | 36,950 | ||||
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Liabilities
and Stockholders' Equity
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||||||||
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Current
liabilities:
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||||||||
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Accounts
payable
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$ | 1,285 | $ | 1,437 | ||||
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Accrued
expenses
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3,329 | 4,347 | ||||||
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Accrued
disposition costs
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501 | 423 | ||||||
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Total
current liabilities
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5,115 | 6,207 | ||||||
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Deferred
revenue
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1,000 | 1,000 | ||||||
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Other
long-term liabilities
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131 | 269 | ||||||
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Total
liabilities
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6,246 | 7,476 | ||||||
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Stockholders'
equity:
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||||||||
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Common
stock
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138,135 | 137,438 | ||||||
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Accumulated
deficit
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(120,900 | ) | (107,926 | ) | ||||
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Accumulated
other comprehensive loss
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(54 | ) | (38 | ) | ||||
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Total
stockholders' equity
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17,181 | 29,474 | ||||||
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Total
liabilities and stockholders' equity
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$ | 23,427 | $ | 36,950 | ||||
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See
accompanying notes to condensed financial statements.
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||||||||
Condensed
Statements of Operations (unaudited)
(in
thousands, except per share amounts)
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Three
Months Ended June 30,
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Six
Months Ended June 30,
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|||||||||||||||
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2008
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2007
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2008
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2007
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|||||||||||||
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Contract
revenue
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$ | 152 | $ | 160 | $ | 284 | $ | 160 | ||||||||
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Operating
expenses:
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||||||||||||||||
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Research
and development
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5,538 | 3,763 | 11,678 | 8,749 | ||||||||||||
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General
and administrative
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863 | 872 | 1,943 | 1,991 | ||||||||||||
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Total
operating expenses
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6,401 | 4,635 | 13,621 | 10,740 | ||||||||||||
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Operating
loss
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(6,249 | ) | (4,475 | ) | (13,337 | ) | (10,580 | ) | ||||||||
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Interest
income, net
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155 | 156 | 436 | 304 | ||||||||||||
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Gain
on sale of interest in royalties
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— | 2,500 | — | 2,500 | ||||||||||||
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Other
income, net,
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4 | 3 | 7 | 3 | ||||||||||||
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Loss
from continuing operations
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(6,090 | ) | (1,816 | ) | (12,894 | ) | (7,773 | ) | ||||||||
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Income
(loss) from discontinued operations
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(40 | ) | 40 | (80 | ) | 32 | ||||||||||
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Loss
before income taxes
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(6,130 | ) | (1,776 | ) | (12,974 | ) | (7,741 | ) | ||||||||
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Provision
for income taxes
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— | — | — | (36 | ) | |||||||||||
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Net
loss
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$ | (6,130 | ) | $ | (1,776 | ) | $ | (12,974 | ) | $ | (7,777 | ) | ||||
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Basic
and diluted net loss per share:
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||||||||||||||||
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Loss
from continuing operations
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$ | (0.20 | ) | $ | (0.19 | ) | $ | (0.42 | ) | $ | (0.98 | ) | ||||
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Net
loss
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$ | (0.20 | ) | $ | (0.19 | ) | $ | (0.42 | ) | $ | (0.98 | ) | ||||
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Shares
used to compute basic and diluted net
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||||||||||||||||
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loss
per share
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30,800 | 9,591 | 30,786 | 7,961 | ||||||||||||
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See
accompanying notes to condensed financial statements.
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||||||||||||||||
Condensed
Statements of Cash Flows (unaudited)
(in
thousands)
|
Six
Months Ended June 30,
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||||||||
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2008
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2007
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|||||||
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Cash
flows from operating activities:
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||||||||
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Net
loss
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$ | (12,974 | ) | $ | (7,777 | ) | ||
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Adjustments
to reconcile net loss to net
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||||||||
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cash
used in operating activities:
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||||||||
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Loss
(gain) from discontinued operations
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80 | (32 | ) | |||||
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Depreciation
and amortization
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204 | 189 | ||||||
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Stock-based
compensation expense
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578 | 276 | ||||||
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Amortization
of discount and accretion of premium
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||||||||
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on
marketable securities
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— | 334 | ||||||
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Changes
in operating assets and liabilities:
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||||||||
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Accounts
receivable
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(20 | ) | (99 | ) | ||||
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Prepaid
expenses and other current assets
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93 | (15 | ) | |||||
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Other
long-term assets
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(28 | ) | 15 | |||||
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Accounts
payable
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(152 | ) | (55 | ) | ||||
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Accrued
expenses
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(1,067 | ) | (515 | ) | ||||
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Net
cash used in continuing operating activities
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(13,286 | ) | (7,679 | ) | ||||
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Net
cash provided by (used in) discontinued
operations
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19 | (4 | ) | |||||
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Net
cash used in operating activities
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(13,267 | ) | (7,683 | ) | ||||
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Cash
flows from investing activities:
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||||||||
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Purchases
of property and equipment
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(288 | ) | (31 | ) | ||||
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Maturities
of marketable securities
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372 | 2,825 | ||||||
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Sales
of marketable securities
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— | 5,678 | ||||||
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Net
cash provided by investing activities
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84 | 8,472 | ||||||
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Cash
flows from financing activities:
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||||||||
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Proceeds
from issuance of common stock, net of issuance cost
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— | 37,550 | ||||||
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Proceeds
from the exercise of stock options
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2 | — | ||||||
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Proceeds
from issuance of shares under the
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||||||||
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Employee
Stock Purchase Plan
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27 | 38 | ||||||
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Net
cash provided by financing activities
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29 | 37,588 | ||||||
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Net
increase (decrease) in cash and cash equivalents
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(13,154 | ) | 38,377 | |||||
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Cash
and cash equivalents, beginning of the period
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33,510 | 2,333 | ||||||
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Cash
and cash equivalents, end of the period
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$ | 20,356 | $ | 40,710 | ||||
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See
accompanying notes to condensed financial statements.
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||||||||
Notes
to Condensed Financial Statements
June
30, 2008 and 2007 (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. We completed enrollment of our pivotal Phase III clinical
trial in the second quarter of 2008 and to expect to announce results of that
trial in the third quarter of 2008. We expect to submit our new drug
application, or NDA, for approval of APF530 in the fourth quarter of
2008.
Our
primary focus is to advance our proprietary Biochronomer technology, consisting
of bioerodible polymers designed to release drugs over a defined period. The
Biochronomer technology can effectively deliver drugs over periods varying
from
days to several months. We have completed comprehensive animal and
human toxicology studies that have established that our Biochronomer polymers
are safe and well tolerated. 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. Our
lead product candidate, which utilizes our proprietary Biochronomer technology,
is APF530. APF530 is designed to prevent CINV for at least five days and
contains granisetron, a drug approved for this indication. In September 2005,
we
completed a Phase II clinical trial of APF530 that achieved all of its primary
and secondary endpoints. In May 2006, we initiated our pivotal Phase III
clinical trial with AFP530. We believe that this clinical trial will lead to
regulatory approval of APF530 for the prevention of acute and delayed onset
CINV
for patients undergoing both moderately and highly emetogenic, or
vomit-inducing, chemotherapy.
In
addition to our lead drug candidate, we have a pipeline of other product
candidates. One of these, APF112, incorporates the well-known local anesthetic,
mepivacaine. It is designed to provide up to 36 hours of post-surgical pain
relief and to minimize the use of morphine-like drugs, or opiates, which are
used extensively in post-surgical pain management. Post-surgical pain can be
treated with local anesthetics, but the usefulness of these drugs is currently
limited by the short duration of their effectiveness. A longer acting
local anesthetic would be expected to result in better pain management and
a
reduced need for opiates. Our plan was to initiate a Phase IIb
clinical trial for APF112 in the first half of 2008. However, in late
April 2008, we determined that some recently manufactured batches of our
polymer, AP135, intended for use in our APF112 trial, contained trace amounts
of
an extraneous material not present in previous lots of
APF135. Investigation indicated that this extraneous substance was
introduced into the production process at our contract manufacturer via the
use
of a solvent. Based upon the results of additional testing we believe
that the presence of the material affects only the cosmetic properties of the
polymer and there are no related toxicology or drug release
issues. We are working closely with our manufacturer to establish
permanent and rigorous inspection procedures to prevent the occurrence of any
future contamination.
Corrective
actions have been taken and production of APF112 trial materials was resumed
late in the second quarter of 2008. This has, however, resulted in a
delay in the planned initiation of the APF112 Phase IIb trial into the fourth
quarter of 2008. This manufacturing issue will have no impact on the
APF530 development timelines.
We
have
several additional product candidates using our Biochronomer technology in
early
stages of development. This includes APF580, which incorporates an
opiate into our Biochronomer technology, and is designed to provide analgesia
lasting up to seven days by a single injection. It is targeted for
situations where the intensity and duration of pain require use of an opiate
rather than a local anesthetic.
Animal
studies with APF580 are currently being conducted, and data from those studies
are being supplemented with additional preclinical data from an ongoing research
and development agreement with a major animal health company, which is
evaluating APF580 for use in cats and dogs. We are currently
completing our preparation of the Investigational New Drug Application (IND)
for
APF580.
The
submission of the IND,
which was originally planned for late in the second quarter of 2008, is now
expected in the third quarter of 2008. The delay versus previous expectations
was largely due to an extended period of time for the collection of
certain preclinical information and not a result of the above-mentioned
manufacturing issue involving AP135.
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 six months ended June
30, 2008 are not indicative of the results that may be expected for the year
ending December 31, 2008 or for any other period. The condensed
balance sheet as of December 31, 2007 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, 2007 filed with the Securities
and
Exchange Commission (the “SEC”) on March 30, 2008 (our “2007
10-K”).
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires our management to make estimates and assumptions
about future events that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ significantly from those
estimates. We believe the following policies to be critical to understanding
our
financial condition, results of operations, and expectations for 2008, because
these policies require management to make significant estimates, assumptions
and
judgments about matters that are inherently uncertain.
• Revenue
Recognition
Our
revenue arrangements with multiple deliverables are divided into separate units
of accounting if certain criteria are met, including whether the delivered
item
has stand-alone value to the customer and whether there is objective and
reliable evidence of the fair value of the undelivered items. 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.
• 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 an additional $2.5
million based on the satisfaction of certain other predetermined
milestones.
• Cash
Equivalents and Short-term Investments
We
invest
excess cash in a variety of high grade primarily short–term interest-bearing
securities. We consider all short-term investments in debt securities
which have original maturities of less than three months at the date of purchase
to be cash equivalents. Investments with 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. If the estimated fair value of a security is
below its carrying value, we evaluate whether we have the intent and ability
to
retain our investment for a period of time sufficient to allow for any
anticipated recovery in market value and whether evidence indicating that the
cost of the investment is recoverable within a reasonable period of time
outweighs evidence to the contrary. If the impairment is
considered to be other-than–temporary, the security is written down to its
estimated fair value. Other-than-temporary declines in estimated fair
value of all marketable securities are charged to “other income (loss),
net”. The cost of all securities sold is based on the specific
identification method.
7
• Contract
Revenue
Contract
revenue relates to research and development arrangements that generally provide
for us 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.
• Clinical
Trial
Accruals
Our
expenses related to clinical trials are based on estimates of the services
received and efforts expended pursuant to contracts with multiple research
institutions and clinical research organizations that conduct and manage
clinical trials on our behalf. Since the invoicing related to these services
does not always coincide with our financial statement close process, we must
estimate the level of services performed and fees incurred in determining the
accrued clinical trial costs. The financial terms of these agreements are
subject to negotiation and variation from contract to contract and may result
in
uneven payment flows. Payments under the contracts depend on factors such as
the
successful enrollment of patients or achievement of certain events or the
completion of portions of the clinical trial or similar conditions. The Phase
III clinical trial of APF530 has a significant effect on the Company’s research
and development expenses. Expenses related to clinical trials generally are
accrued based on the level of patient enrollment and services performed by
the
clinical research organization or related service provider according to the
protocol. We monitor patient enrollment levels and related activity to the
extent possible and adjust our estimates accordingly. Historically these
estimates have been accurate and no material adjustments have had to be
made.
• Income
Taxes
We
make
certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the calculation
of
certain tax assets and liabilities, which arise from differences in the timing
of recognition of revenue and expense for tax and financial statement purposes.
As part of the process of preparing our financial statements, we are required
to
estimate our income taxes in each of the jurisdictions in which we operate.
This
process involves us estimating our current tax exposure under the most recent
tax laws and assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes.
We
assess
the likelihood that we will be able to recover our deferred tax assets. We
consider all available evidence, both positive and negative, including our
historical levels of income and losses, expectations and risks associated with
estimates of future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance. If we do not
consider it more likely than not that we will recover our deferred tax assets,
we will record a valuation allowance against the deferred tax assets that we
estimate will not ultimately be recoverable. At June 30, 2008, we believed
that
the amount of our deferred income taxes would not be ultimately recovered.
Accordingly, we recorded a full valuation allowance for deferred tax assets.
However, should there be a change in our ability to recover our deferred tax
assets, we would recognize a benefit to our tax provision in the period in
which
we determine that it is more likely than not that we will recover our deferred
tax assets.
• Stock-Based
Compensation
We
measure stock-based compensation at the grant date based on the award’s fair
value and recognize the expense ratably over the requisite vesting period,
net
of estimated forfeitures, for all stock-based awards granted after
January 1, 2006 and all stock-based awards granted prior to, but not vested
as
of January 1, 2006.
We
have
elected to calculate an award’s fair value based on the Black-Scholes
option-pricing model. The Black-Scholes model requires various
assumptions, including expected option life and volatility. If any of
the assumptions used in the Black-Scholes model or the estimated forfeiture
rate
changes significantly, stock-based compensation expense may differ materially
in
the future from that recorded in the current period. Prior to January
1, 2008, we calculated the expected term of an option using the simplified
method provided in Staff Accounting Bulletin No. 107 and starting January 1,
2008, we are using historical data to calculate the expected option
term.
8
Recent
Accounting Pronouncements
Effective
January 1, 2008 we adopted SFAS 157, Fair Value Measurements
(“SFAS157”). In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No 157, which provides a one year
deferral (effective for years beginning after November 15, 2008) of the
effective date of SFAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Therefore, we have
adopted the provisions of SFAS 157 with respect to our financial assets and
liabilities only. SFAS 157 defines fair value, establishes a
framework for measuring fair value under generally accepted accounting
principles and enhances disclosures about fair value
measurements. Fair value is defined under SFAS 157 as the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value under SFAS
157
must maximize the use of observable inputs and minimize the use of unobservable
inputs. The standard describes a fair value hierarchy based on three
levels of inputs, of which the first two are considered observable and the
last
unobservable, that may be used to measure fair value which are the
following:
|
·
|
Level
1 – Quoted prices in active markets for identical assets or
liabilities.
|
|
·
|
Level
2 - Inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active;
or
other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
|
|
·
|
Level
3 – Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
The
adoption of this statement did not have a material impact on our results of
operations, financial condition or cash flow.
Effective
January 1, 2008 we adopted SFAS No. 159, The Fair Value Option for
Financial
Assets and Financial Liabilities- including an amendment of FASB
Statement No. 115 (“SFAS 159”). SFAS 159 allows an entity the
irrevocable option to elect fair value for the initial and subsequent
measurement for specified financial assets and liabilities on a
contract-by-contract basis. We did not elect to apply the fair value option
under SFAS 159.
Effective
January 1, 2008, we adopted EITF 07-3, Accounting for Advance Payments
for
Goods and Services to be Received for Use in Future Research and Development
Activities (“EITF 07-03). EITF 07-03 requires that
non-refundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and
capitalized and recognized as an expense as the goods are delivered or the
related services are performed, subject to an assessment of
recoverability. The adoption did not have a material
impact on our results of operations or financial condition.
In
November 2007, the EITF issued EITF Issue No. 07-1 ("EITF 07-1"), Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual
Property. Companies may enter into arrangements with other companies to
jointly develop, manufacture, distribute, and market a product. Often the
activities associated with these arrangements are conducted by the collaborators
without the creation of a separate legal entity (that is, the arrangement is
operated as a "virtual joint venture"). The arrangements generally
provide that the collaborators will share, based on contractually defined
calculations, the profits or losses from the associated activities.
Periodically, the collaborators share financial information related to product
revenues generated (if any) and costs incurred that may trigger a sharing
payment for the combined profits or losses. The consensus requires collaborators
in such an arrangement to present the result of activities for which they act
as
the principal on a gross basis and report any payments received from (made
to)
other collaborators based on other applicable GAAP or, in the absence of other
applicable GAAP, based on analogy to authoritative accounting literature or
a
reasonable, rational, and consistently applied accounting policy
election. EITF 07-1 is effective for collaborative arrangements in
place at the beginning of the annual period beginning after December 15,
2008. Management does not expect that the adoption EITF 07-1 will
have a material impact on our financial position and results of
operations.
In
December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations
(“SFAS141R”). SFAS 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest of the
acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of
the
business combination. This statement is effective for us beginning
January 1, 2009. We will assess the potential impact of the adoption of
SFAS 141R if and when a future acquisition occurs.
In
December 2007, the FASB approved the issuance of SFAS No. 160. Non-controlling Interests
in
Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS
160”). SFAS 160 will change the accounting and reporting for minority
interests, which will now be termed non-controlling
interests. SFAS 160 requires non-controlling interest to be
presented as a separate component of equity and requires the amount of net
income attributable to the parent and to the non-controlling interest to be
separately identified on the consolidated statement of
operations. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008. At this time, we do not expect adoption of
SFAS 160 to have any impact on our financial position, results of operations
or
cash flows.
In
March
2008, the FASB issued FAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No. 133
( “SFAS 161”). SFAS 161 requires enhanced disclosure related
to derivatives and hedging activities and thereby seeks to improve the
transparency of financial reporting. Under SFAS 161, entities are
required to provide enhanced disclosures relating to: (a) how and why
an entity uses derivative instruments; (b) how derivative instruments and
related hedge items are accounted for under SFAS 133 Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133’) and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash
flows. SFAS 161 must be applied prospectively to all derivative
instruments and non-derivative instruments that are designated and qualify
as
hedging instruments and related hedged items accounted for under SFAS 133 for
all financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. We do not expect adoption of SFAS 161 to have any
impact on our financial position, results of operations or cash
flows.
In
April
2008, the FASB issued FASB Staff Position No. FAS 142-3 Determination of the Useful
Life of
Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors
that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FASB Statement No 142 Goodwill and Other Intangible
Assets and requires enhanced disclosures relating to: (a) the entity’s
accounting policy on the treatment costs incurred to renew or extend the term
of
a recognized intangible asset; (b) in the period of acquisition or renewal,
the
weighted-average period prior to the next renewal or extension (both explicit
and implicit), by major intangible asset class and (c) for an entity that
capitalizes renewal or extension costs, the total amount of costs incurred
in
the period to renew or extend the term of a recognized intangible asset for
each
period for which a statement of financial position is presented by major
intangible asset class. FSP 142-3, must be applied prospectively to
all intangible assets acquired as of and subsequent to fiscal years beginning
after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. We do not expect
adoption of FSP142-3 to have any impact on our financial position, results
of
operations or cash flows.
10
(2) FAIR
VALUE
In
accordance with SFAS 157, the following table represents the Company’s fair
value hierarchy for its financial assets (cash equivalents and investments)
measured at fair value on a recurring basis as of June 30, 2008 (in
thousands):
|
Level
1
|
Level
2
|
|
Level
3
|
Total
|
|||||||
|
Money
market funds
|
$
|
20,033
|
$
|
—
|
$
|
—
|
$
|
20,033
|
|||
|
Asset
backed securities
|
—
|
1,164
|
—
|
1,164
|
|||||||
|
Total
|
$
|
20,033
|
$
|
1,164
|
$
|
—
|
$
|
21,197
|
|||
(3) NET
LOSS PER SHARE INFORMATION
Basic
and
diluted net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted net loss per share
excludes the effect of potentially dilutive securities because they are
anti-dilutive. Such potentially dilutive securities at June 30, 2008
include outstanding stock options for 1,586,480 common shares and unearned
restricted stock awards for 72,750 common shares.
(4)
STOCK-BASED COMPENSATION
The
following table shows the stock-based compensation expense for all awards (in
thousands except per share amount):
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Research
and development
|
$ | 220 | $ | 48 | $ | 285 | $ | 104 | ||||||||
|
General
and administrative
|
63 | 65 | 293 | 172 | ||||||||||||
|
Total
stock-based compensation expense
|
$ | 283 | $ | 113 | $ | 578 | 276 | |||||||||
|
Impact
on basic and diluted net loss per common share
|
$ | .01 | $ | .01 | $ | .02 | $ | .03 | ||||||||
The
following table summarizes option activity for the six months ended June 30,
2008:
|
Shares
|
Weighted
Average
Exercise
Price
|
||
|
Outstanding
at January 1, 2008
|
550,383
|
$ 8.57
|
|
|
Granted
|
1,099,300
|
$ 1.42
|
|
|
Expired
and Forfeited
|
(61,495
|
)
|
$ 8.74
|
|
Exercised
|
(1,708
|
)
|
$ 1.37
|
|
Outstanding
at June 30, 2008
|
1,586,480
|
$ 3.62
|
Employee
Stock Purchase Plan.
We adopted an Employee Stock Purchase Plan (the “Purchase Plan”) in 1997.
Qualified employees may elect to have a certain percentage of their salary
withheld to purchase shares of our common stock under the Purchase Plan. The
purchase price per share is equal to 85% of the fair market value of the stock
on specified dates. Sales under the purchase plan in the six months
periods ending June 30, 2008 and 2007 were 26,103 and 11,254 shares at an
average price of $1.03 and $3.40 per share respectively. Shares
available for future purchase under the Purchase Plan are 107,057 at June 30,
2008.
We
modified our ESPP such that the length of all offering periods, beginning May
1,
2008 is six months. Consequently, there is no reset feature associated with
any
new offering period. Our closing stock price on the April 30, 2008 ESPP purchase
date was lower than the closing price on the November 1, 2007 offering date.
As
a result, participants were re-enrolled into a new six-month offering period,
beginning May 1, 2008 and ending October 31, 2008. As a result of the amendment,
$41 of compensation cost was accelerated or generated of which $33 was
recognized during the quarter ended June 30, 2008.
11
(5) COMPREHENSIVE
LOSS
Comprehensive
loss for the three and six months ended June 30, 2008 and 2007 consists of
the
following (in thousands):
|
Three
Months Ended
June
30,
|
Six Months
Ended
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Net
loss
|
$ | (6,130 | ) | $ | (1,776 | ) | $ | (12,974 | ) | $ | (7,777 | ) | ||||
|
Unrealized
gains (losses) on available-for-sale marketable
securities
|
(4 | ) | 5 | (16 | ) | 12 | ||||||||||
|
Comprehensive
loss
|
$ | (6,134 | ) | $ | (1,771 | ) | $ | (12,990 | ) | $ | (7,765 | ) | ||||
(6) INCOME
TAXES
There
is
no provision for income taxes for the three or six months ended June 30, 2008
because we incurred net operating losses. In the first quarter of
2007 we recorded a catch up provision of $36 for California State Alternative
Minimum Tax.
(7) STOCKHOLDERS’
EQUITY
In
June,
2007, we sold 24,393,939 shares of common stock in a public offering at a price
of $1.65 per share, for net proceeds of approximately $37.2 million after
deducting underwriting fees and costs associated with the offering. The shares
were offered under our registration statement on Form S-1, as amended
(Registration No. 333-141918).
On
May 23, 2007, we filed a Certificate of Amendment to our Certificate of
Incorporation with the Secretary of State of the State of Delaware affecting
a
1-for-4 reverse stock split of our common stock. All share and per share amounts
for all periods presented have been retroactively restated to reflect the
reverse stock split.
(8) 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 primarily the loss attributable
to changes in estimates of our cosmeceutical and toiletry business that was
sold
to RP Scherer on July 25, 2000, as follows (in thousands):
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Analytical
Standards
Division
|
||||||||||||||||
|
Royalties
earned in excess of minimum
amount recorded
|
$ |
—
|
$ | 1 | $ |
—
|
$ | 17 | ||||||||
|
|
||||||||||||||||
|
Cosmeceutical
and Toiletry
Business
|
||||||||||||||||
|
Change
in estimates for gross profit guarantees
|
(40 | ) | 39 | (80 | ) | 15 | ||||||||||
|
Total
income (loss) from discontinued operations
|
$ | (40 | ) | $ | 40 | $ | (80 | ) | $ | 32 | ||||||
12
Basic
and
diluted income (loss) per common share from discontinued operations was less
than $0.01 per share for the three and six months ended June 30, 2008 and
2007.
As
of
June 30, 2008, liabilities related to the discontinued operations in the amount
of $501 represent accruals for gross profit guarantees. These liabilities are
reported as accrued disposition costs in the accompanying balance
sheets.
The
cash
provided by discontinued operations of $19 in 2008 relates to royalties received
from GFS Chemicals, Inc. (“GFS”), a privately held company based in Columbus,
Ohio, from sales of Analytical Standards products. The cash used in discontinued
operations of $4 in 2007 relates to a payment of $52 in conjunction
with the Gross Profit Guaranty offset by royalties received
from GFS from sales of Analytical Standards products.
On
February 13, 2003, we completed the sale of our Analytical Standards
division to GFS. In this transaction, we received $2.1 million on closing and
were entitled to receive royalties on sales of Analytical Standards products
for
a period of five years following the sale at rates ranging from 5% to
15%. As of June 30, 2008, all royalties due from GFS have been
received.
In
conjunction with the terms of an agreement with RP Scherer, a subsidiary of
Cardinal Health, where we sold certain technology rights associated with our
cosmeceutical and toiletry business, 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 (the “two period test”). The Gross
Profit Guaranty expense totaled $944 for the first seven guaranty years and
in
those years profits did not meet the two period test. Effective March 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 with the two period
test. Therefore, we expect the annual Gross Profit Guaranty payment to range
from $100 to $200 per annum. Amcol has indicated that its costs differ from
those it charged historically to the RP Scherer successor company to produce
the
product; we have requested documentation of actual costs and have accrued for
2008 at the historical rate. As there is no minimum amount of Gross Profit
Guaranty due, no accrual for the guaranty is estimable for future years. A
liability of $501 and $420 related to the amount due under the gross profit
guaranty is included in accrued disposition costs as of June 30, 2008 and
December 31, 2007, respectively.
(9)
SUBSEQUENT EVENTS
On
July
3, 2008, our Board of Directors approved an increase to the number of shares
available for grant under our Non-Qualified Stock Option Plan by one million
shares. The Non-Qualified Stock Option Plan is used for inducement
grants.
On
July
7, 2008 we announced the appointment of Ronald Prentki as our President and
Chief Executive Officer (CEO). In conjunction with Ron’s appointment, he was
granted a stock option for 1.4 million shares. The options vest over a four
year
period with 25% of the shares vesting one year from July 7, 2008 and have an
exercise price of $1.19, the fair market value on the date of the
grant.
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, reliance on third parties, including contract
manufacturers 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.
Results
of Operations for the Three and Six Months Ended June 30, 2008 and 2007 (in
thousands unless otherwise indicated)
Contract
revenue, which is derived from work performed under collaborative research
and
development arrangements, was $152, $160, $284 and $160 for the three months
ended June 30, 2008 and 2007 and the six months ended June 30, 2008 and 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.
Research
and development expense for the three months ended June 30, 2008 increased
by
$1,775 from $3,763 for the three months ended June 30, 2007 to $5,538. The
increase was primarily as a result of an increase in our APF530 Phase 3 clinical
trial and related costs. Additionally, there were increases in costs
associated with our post-operative pain product and our undisclosed opiate
pain
product. Salaries and related costs, including stock based
compensation, increased to support the increased activities and outside costs
also increased. Research and development expense for the six months
ended June 30, 2008 increased by $2,929 from $8,749 for the six months ended
June 30, 2007 to $11,678. The increase was primarily due to increased
expenses for our undisclosed opiate pain product, increased clinical trial
and
related expenses for APF530 and increased expenses for our post-operative pain
product. Salaries and related costs, including stock based
compensation, also increased to support the increased clinical
activities, as did outside costs. We expect research and
development expense to decrease in the second half of 2008, reflecting the
completion of our Phase 3 study for APF530.
General
and administrative expense decreased for the three months ended June 30, 2008
by
$9 from $872 for the three months ended June 30, 2007, to
$863. General and administrative expense decreased by $48 for the six
months ended June 30, 2008 from $1991 for the six months ended June 30, 2007,
to
$1943. Stock-based compensation expense was higher for the six months
offset by lower outside services and salaries. We expect general and
administrative expense in the second half of 2008 to increase due to the
appointment of our new Chief Executive Officer and costs associated with other
executive recruitment activities.
Interest
income, net, increased for the six months ended June 30, 2008 by $132 to $436
from $304 for the six months ended June 30, 2007 primarily due to higher average
balance of cash, cash equivalents and marketable securities.
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 was 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 other predetermined milestones.
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 loss from discontinued operations
totaled $40 for the three months ended June 30, 2008, compared to net income
of
$40 in the three months ended June 30, 2007. Net loss from
discontinued operations totaled $80 for the six months June 30, 2008 compared
to
net income of $32 for the six months ended June 30, 2007. The loss for the
three
and six months ended June 30, 2008 reflects our expectation that the Gross
Profit Guaranty payment for 2008 will be in the range of $100 to $200 for
2008. The company that now owns rights to the cosmeceutical and
toiletries business has indicated that its costs differ from those it charged
historically to the RP Scherer successor company to produce the product; we
have
requested documentation of actual costs.
14
Capital
Resources and Liquidity
Cash
and
cash equivalents decreased by $13.1 million to $20.4 million at June 30, 2008
from $ 33.5 million at December 31, 2007 due primarily to our net loss for
the
six months ended June 30, 2008.
Net
cash
used in continuing operating activities for the six months ended June 30, 2008
was $13.3 million, compared to net cash used of $7.7 million for the six months
ended June 30, 2007. The increase in net cash used by continuing operating
activities from 2008 to 2007 was mainly due to the increased loss in 2008,
as
compared to the same period in 2007.
Net
cash
provided by investing activities for the six months ended June 30, 2008 was
$84,
compared to net cash provided of $8.5 million from investing activities for
the
six months ended June 30, 2007. The decrease in cash provided by investing
activities was primarily due to lower sales and maturities of marketable
securities in the six months ended June 30, 2008, as compared to the same period
in 2007.
In
the
six months ended June 30, 2007 $37.6 million cash was provided by proceeds
from
issuance of common stock, net of estimated issuance costs.
To
date,
we have financed our operations including technology and product research and
development through the sale of common stock, 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®. We believe 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. We anticipate expenditures to decrease as
activities associated with our Phase III APF530 trial are winding
down.
Our capital
requirements going forward from 2008 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; resources required for gross margin guarantees, 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.
We
may
not be able to raise sufficient additional capital when we need it or to raise
capital on favorable terms. The sale of additional equity or
convertible debt securities in the future may be dilutive to our stockholders,
and debt financing arrangements may require us to pledge certain assets and
enter into covenants that could restrict certain business activities or our
ability to incur further indebtedness and may contain other terms that are
not
favorable to us or our stockholders. If we are unable to obtain
adequate funds on reasonable terms, we may be required to curtail operations
significantly or to obtain funds by entering into financing, supply or
collaboration agreements on unattractive terms.
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 June 30, 2008.
|
Total
|
Less
than
1
year
|
2
to 3
years
|
4
to 5
Years
|
More
than
5
years
|
||||||||||||||||
|
Other
Operating Leases
|
$ | 1,534 | $ | 544 | $ | 956 | $ | 34 | $ |
—
|
||||||||||
Our
exposure to interest rate risk relates primarily to our investment portfolio.
We
do not use derivative financial instruments. We manage our interest
rate risk by maintaining an investment portfolio primarily consisting of debt
instruments of high credit quality and relatively short average
maturities. At June 30, 2008, 93% of our cash, cash equivalents and
marketable securities was held in money market funds.
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 the Interim 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
Interim Chief Financial Officer concluded that as of June 30, 2008, 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 and six months ended
June 30, 2008, there have been no changes in our internal control
over financial reporting that materially affected, or are reasonably likely
to
materially affect, our internal control over financial reporting.
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, 2007.
Our
annual shareholders’ meeting was held on May 28, 2008, at which the following
proposals were approved.
Proposal
I:
Election of the following directors:
|
Votes
For
|
Votes
Withheld
|
||
|
Paul
Goddard
|
21,560,039
|
3,093,472
|
|
|
Peter
Riepenhausen
|
21,580,967
|
3,072,544
|
|
|
Toby
Rosenblatt
|
21,451,544
|
3,201,967
|
|
|
Arthur
Taylor
|
21,579,015
|
3,074,496
|
|
|
Gregory
Turnbull
|
21,565,165
|
3,088,346
|
|
|
Robert
Zerbe
|
21,579,539
|
3,073,972
|
Proposal
II:
To ratify the appointment of Odenberg, Ullakko, Muranishi & Co. LLP as the
Company’s independent registered public accounting firm for the year ending
December 31, 2008.
|
Votes
For
|
Votes
Against
|
Abstain
|
||
|
24,524,835
|
104,681
|
23,995
|
On
July
3, 2008, our Board of Directors approved an increase to the number of shares
available for grant under our Non-Qualified Stock Option Plan by one million
shares. The Non-Qualified Stock Option Plan is used for inducement
grants.
Exhibit
31.1 Certification of Chief Executive Officer
pursuant to
Rules 13A-15(f) promulgated under the Securities Exchange Act of 1934, as
amended.
Exhibit
31.2 Certification of Interim Chief Financial
Officer
pursuant to Rules 13A- 15(f) promulgated under the Securities exchange Act
of
1934, as amended.
Exhibit
32 Certifications of Chief Executive Officer
and Interim
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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:
August 14, 2008
|
/s/
Ronald J. Prentki
|
|
|
Ronald
J. Prentki
|
||
|
President
and Chief Executive Officer
|
||
|
Date:
August 14, 2008
|
/s/
Gregory Turnbull
|
|
|
Gregory
Turnbull
|
||
|
Interim
Chief Financial Officer
|
18