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 March 31, 2008
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
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94063
|
|
(Address
of principal executive offices)
|
(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, 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
|
[ ]
|
Small
Reporting Company
|
[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
April
30, 2008, the number of outstanding shares of the Company's common stock, par
value $.01, was 30,809,654.
A.P.
Pharma, Inc
INDEX
|
Page
No.
|
||
Condensed
Balance Sheets
(in
thousands)
|
March
31, 2008
|
December
31, 2007
|
|||||||
|
(unaudited)
|
(Note
1)
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 26,503 | $ | 33,510 | ||||
|
Marketable
securities
|
1,331 | 1,552 | ||||||
|
Accounts
receivable
|
133 | 152 | ||||||
|
Prepaid
expenses and other current assets
|
419 | 582 | ||||||
|
Total
current assets
|
28,386 | 35,796 | ||||||
|
Property
and equipment, net
|
1,212 | 1,079 | ||||||
|
Other
long-term assets
|
75 | 75 | ||||||
|
Total
assets
|
$ | 29,673 | $ | 36,950 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,390 | $ | 1,437 | ||||
|
Accrued
expenses
|
3,654 | 4,347 | ||||||
|
Accrued
disposition costs
|
463 | 423 | ||||||
|
Total
current liabilities
|
5,507 | 6,207 | ||||||
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Deferred
revenue
|
1,000 | 1,000 | ||||||
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Other
long-term liabilities
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218 | 269 | ||||||
|
Total
liabilities
|
6,725 | 7,476 | ||||||
|
Stockholders'
equity:
|
||||||||
|
Common
stock
|
137,769 | 137,438 | ||||||
|
Accumulated
deficit
|
(114,771 | ) | (107,926 | ) | ||||
|
Accumulated
other comprehensive loss
|
(50 | ) | (38 | ) | ||||
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Total
stockholders' equity
|
22,948 | 29,474 | ||||||
|
Total
liabilities and stockholders' equity
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$ | 29,673 | $ | 36,950 | ||||
|
See
accompanying notes to condensed financial statements.
|
||||||||
Condensed
Statements of Operations (unaudited)
(in
thousands, except per share amounts)
|
Three
Months Ended March 31,
|
||||||||
|
2008
|
2007
|
|||||||
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Contract
revenue
|
$ | 133 | $ | - | ||||
|
Operating
expenses:
|
||||||||
|
Research
and development
|
6,140 | 4,987 | ||||||
|
General
and administrative
|
1,080 | 1,118 | ||||||
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Total
operating expenses
|
7,220 | 6,105 | ||||||
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Operating
loss
|
(7,087 | ) | (6,105 | ) | ||||
|
Interest
income, net
|
280 | 148 | ||||||
|
Other
income, net
|
3 | - | ||||||
|
Loss
from continuing operations
|
(6,804 | ) | (5,957 | ) | ||||
|
Loss
from discontinued operations
|
(40 | ) | (8 | ) | ||||
|
Loss
before income taxes
|
(6,844 | ) | (5,965 | ) | ||||
|
Provision
for income taxes
|
- | (36 | ) | |||||
|
Net
loss
|
$ | (6,844 | ) | $ | (6,001 | ) | ||
|
Basic
and diluted net loss per share:
|
||||||||
|
Loss
from continuing operations
|
$ | (0.22 | ) | $ | (0.94 | ) | ||
|
Net
loss
|
$ | (0.22 | ) | $ | (0.95 | ) | ||
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Shares
used to compute basic and
|
||||||||
|
diluted
net loss per share
|
30,773 | 6,331 | ||||||
|
See
accompanying notes to condensed financial statements.
|
||||||||
Condensed
Statements of Cash Flows (unaudited)
(in
thousands)
|
Three
Months Ended March 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (6,844 | ) | $ | (6,001 | ) | ||
|
Adjustments
to reconcile net loss to net
|
||||||||
|
cash
used in operating activities:
|
||||||||
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Loss
from discontinued operations
|
40 | 8 | ||||||
|
Depreciation
and amortization
|
98 | 95 | ||||||
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Stock-based
compensation expense
|
295 | 163 | ||||||
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Amortization
of discount and accretion of premium on marketable
securities
|
- | (22 | ) | |||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(2 | ) | (69 | ) | ||||
|
Prepaid
expenses and other current assets
|
163 | 87 | ||||||
|
Other
long-term assets
|
- | 19 | ||||||
|
Accounts
payable
|
(47 | ) | (195 | ) | ||||
|
Accrued
expenses
|
(709 | ) | (232 | ) | ||||
|
Net
cash used in continuing operating activities
|
(7,006 | ) | (6,147 | ) | ||||
|
Net
cash provided by (used in) discontinued operations
|
21 | (21 | ) | |||||
|
Net
cash used in operating activities
|
(6,985 | ) | (6,168 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchases
of property and equipment
|
(231 | ) | (21 | ) | ||||
|
Maturities
of marketable securities
|
- | 1,500 | ||||||
|
Sales
of marketable securities
|
209 | 3,361 | ||||||
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Net
cash provided by (used in) investing activities
|
(22 | ) | 4,840 | |||||
|
Net
decrease in cash and cash equivalents
|
(7,007 | ) | (1,328 | ) | ||||
|
Cash
and cash equivalents, beginning of the period
|
33,510 | 2,333 | ||||||
|
Cash
and cash equivalents, end of the period
|
$ | 26,503 | $ | 1,005 | ||||
|
See
accompanying notes to condensed financial statements.
|
||||||||
Notes
to Condensed Financial Statements
March
31, 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 expect to complete enrollment of our pivotal Phase III
clinical trial in the second quarter of 2008 and 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. 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.
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 the prevention of CINV. 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 of 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 that use our Biochronomer technology. 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 is currently limited by the short duration of their
effectiveness. For
over
a year our plan has been to initiate a Phase IIb clinical trial for APF112
in
the first half of 2008, and recently we and our suppliers have been preparing
trial materials. In late April, 2008, we determined that some
recently manufactured batches of our polymer, AP135, intended for use in our
APF112 trial, contained an extraneous material not present in previous lots
of
AP135. Investigation indicates a high probability that this
extraneous substance was introduced into the production process at our contract
manufacturer via the use of a solvent containing such material. The
presence of the material seems to affect only the cosmetic properties of the
polymer, and based upon the results of tests we believe there are no related
toxicology or drug release issues. We are working closely with our
manufacturer to verify the results of our investigation, and to establish
appropriate procedures to eliminate the utilization of any solvent containing
such extraneous material.
Based
upon current information, we believe we will be able to conclude corrective
actions and reinitiate production of APF112 trial materials in the
second quarter of 2008. This will, however, result in a deferral
in the initiation of the planned APF112 Phase IIb trial into the third quarter
of 2008. There should be no impact of this manufacturing issue on the
APF530 Phase III clinical trial, the planned timeline of announcing results
of
that trial in the third quarter and the submission of the APF530 NDA by year-end
2008.
We
have
several additional product candidates using our Biochronomer technology in
early
stages of development. For example, we plan to initiate a Phase I clinical
trial
of APF580 in the second quarter of 2008 for the controlled delivery of an opiate
for pain relief. We
believe the above-mentioned manufacturing issue experienced in preparing for
the
APF112 clinical trial will not affect the timelines associated with the APF580
program.
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 months ended March 31, 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 31, 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.
• Royalties
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.
• 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 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.
• 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 trials of APF530 have 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 March 31, 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.
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 the Company 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 or 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 the Company's 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.
(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 March 31, 2008 (in
thousands):
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Money
market funds
|
$ | 26,441 | $ | - | $ | - | $ | 26,441 | ||||||||
|
Asset
backed securities
|
$ | - | $ | 1,331 | $ | - | $ | 1,331 | ||||||||
|
Total
|
$ | 26,441 | $ | 1,331 | $ | - | $ | 27,772 | ||||||||
(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 March 31, 2008
include outstanding stock options for 1,530,011 common shares and unearned
restricted stock awards for 33,750 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
March 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Operating
expenses:
|
||||||||
|
Research
and development
|
$
|
65
|
$
|
57
|
||||
|
General
and administrative
|
230
|
106
|
||||||
|
Total
stock-based compensation expense
|
$
|
295
|
$
|
163
|
||||
|
Impact
on basic and diluted net loss per common share
|
$
|
.01
|
$
|
.03
|
||||
The
following table summarizes option activity for the three months ended March
31,
2008:
|
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual Term
(Years)
|
||||||||||
|
Outstanding
at January 1, 2008
|
550,383 |
$
|
8.57
|
5.67
|
||||||||
|
Granted
|
1,027,300 |
$
|
1.40
|
|||||||||
|
Expired
and Forfeited
|
(47,672 | ) |
$
|
4.86
|
||||||||
|
Outstanding
at March 31, 2008
|
1,530,011 |
$
|
3.87
|
8.31
|
||||||||
Employee
Stock Purchase Plan.
The company 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 the company's 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. There were no sales under the Purchase
Plan in the three month periods ended March 31, 2008 and 2007. Shares
available for future purchase under the Purchase Plan are 133,160 at March
31,
2008.
(5) COMPREHENSIVE LOSS
Comprehensive
loss for the three months ended March 31, 2008 and 2007 consists of the
following (in thousands):
|
Three
Months Ended
March
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Net
loss
|
$ | 6,844 | $ | 6,001 | ||||
|
Unrealized
losses (gains) on available-for-sale marketable
securities
|
12 | (7 | ) | |||||
|
Comprehensive
loss
|
$ | 6,856 | $ | 5,994 | ||||
(6) INCOME
TAXES
There
is
no provision for income taxes for the first quarter of 2008 because we incurred
net operating losses. In the first quarter of 2007 we recorded a
catch up provision of $36,000 for California State Alternative Minimum
Tax.
(7) STOCKHOLDERS’
EQUITY
On
June
19, 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 effecting
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.
On
December 18, 2006, we entered into a Preferred Shares Rights Agreement. As
part of this agreement, preferred stock purchase rights (“the rights”) were
distributed to stockholders of record as of January 2, 2007 (and to each
person who acquires our common stock after that date unless determined otherwise
by the board of directors) at the rate of one right for each share of common
stock held. The rights become exercisable only upon the acquisition, or the
acquisition of the right to acquire, by a person or group of affiliated or
associated persons, of 20% or more of the outstanding shares of the Company’s
common stock. Once exercisable, each right entitles the holder to purchase,
at a
price of $44.00, one one-thousandth of a share of Series A Participating
Preferred Stock. For a limited period of time following the announcement of
any
such acquisition or offer, the rights are redeemable by the Company at a price
of $0.01 per right. If the rights are not redeemed or exchanged, each right
will
then entitle the holder to receive, upon exercise of such right, a number of
shares of the Company’s common stock having a then current value equal to two
times the purchase price of such right. Similarly, if the rights are not
redeemed or exchanged and following the acquisition of 20% or more of the
outstanding shares of the Company’s common stock by a person or group of
affiliated or associated persons, (i) the Company consolidates with or
merges into another entity, (ii) another entity consolidates with or merges
into the Company or (iii) the Company sells or otherwise transfers 50% or
more of its consolidated assets or earning power, each right will then entitle
the holder to receive, upon exercise of such right, a number of shares of common
stock of the acquiring company having a then current value equal to two times
the purchase price. For a limited period of time after the exercisability of
the
rights, each right, at the discretion of the board of directors, may be
exercised for such number of shares of common stock determined in accordance
with the rights agreement. The Company has initially reserved 200,000 shares
of
preferred stock pursuant to the exercise of these rights. These rights expire
on
December 31, 2016.
(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.
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
March
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Analytical
Standards Division
|
||||||||
|
Royalties
earned in excess of minimum amount recorded
|
$ | - | $ | 16 | ||||
|
Cosmeceutical
and Toiletry Business
|
||||||||
|
Change
in estimates for gross profit guarantees
|
(40 | ) | (24 | ) | ||||
|
Total
loss from discontinued operations
|
$ | (40 | ) | $ | (8 | ) | ||
Basic
and
diluted loss per common share from discontinued operations was less than $0.01
per share for the three months ended March 31, 2008 and 2007.
As
of
March 31, 2008, liabilities related to the discontinued operations in the
amount of $463,000 include severance costs and 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 $21,000 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 $21,000 in 2007 relates to a payment of $52,000
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 March 31, 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 $944,000 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 $100,000 to $200,000 for the remainder of the guaranty period. As there
is
no minimum amount of Gross Profit Guaranty due, no accrual for the guaranty
is
estimable for future years. A liability of $460,000 and $420,000 related to
the
amount due under the gross profit guaranty is included in accrued disposition
costs as of March 31, 2008 and December 31, 2007, respectively.
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.
Results
of Operations for the Three months Ended March 31, 2008 and 2007 (in thousands
unless otherwise indicated)
Contract
revenue, which is derived from work performed under collaborative research
and
development arrangements, was $133 and $0 for the three months ended March
31,
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.
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 first quarter of 2008 and 2007. 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 March 31, 2008 increased
by
$1,153 from $4,987 for the three months ended March 31, 2007 to $6,140 primarily
due to increased expenditures on APF580, our undisclosed opiate product
candidate for pain, personnel and related costs to support our expanded
activities including increased expenditures in conjunction with our Phase 3
trial for APF530 and ,to a lesser extent expenditures on APF112, our
post-operative pain product. We expect research and development expense to
increase in 2008, over the 2007 level reflecting development personnel to
support the expanded clinical trial and other activities with some offset from
reduced APF530 expenses.
General
and administrative expense decreased for the three months ended March 31, 2008
by $38 from $1,118 for the three months ended March 31, 2007 to $1,080 due
primarily to decreased professional fees and salary and related, offset somewhat
by increased stock-based compensation expense. Changes in the rate of
general and administrative expenses for the remaining quarters of 2008 will
depend primarily on the timing and costs associated with executive recruitment
activities.
Net
interest income increased for the three months ended March 31, 2008 by $132
to
$280 from $148 for the three months ended March 31, 2007 primarily due to higher
average balance of cash, cash equivalents and marketable
securities.
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 March 31, 2008, compared with a net
income of $8 in the three months ended March 31, 2007. The $40 loss
for the three months ended March 31, 2008 reflects our expectation that the
Gross Profit Guaranty payment for 2008 will be in the range of $100,000 to
$200,000 for 2008.
Capital
Resources and Liquidity
Cash,
cash equivalents and marketable securities decreased by $7.2 million to $27.8
million at March 31, 2008 from $ 35.0 million at December 31, 2007 due primarily
to our net loss for the three months ended March 31, 2008.
Net
cash
used in continuing operating activities for the three months ended March 31,
2008 was $7.0 million, compared to net cash used of $6.1 million for the three
months ended March 31, 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
used by investing activities for the three months ended March 31, 2008 was
$22,000, compared to net cash provided of $4.8 million from investing activities
for the three months ended March 31, 2007. The increase in cash used in
investing activities was primarily due to lower sales and maturities of
marketable securities in the three months ended March 31, 2008, as compared
to
the same period in 2007.
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®. 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 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; 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 March 31, 2008.
|
Total
|
Less
than
1
year
|
2
to 3
years
|
4
to 5
Years
|
More
than
5
years
|
||||||||||||||||
|
Other
Operating Leases
|
$ | 1,618 | $ | 537 | $ | 1,067 | $ | 14 | $ | - | ||||||||||
Item
3. Quantitative and Qualitative Disclosure
about Market Risk
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 March 31, 2008, 95% of our portfolio was held in a
money market fund.
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 who is also 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/Interim
Chief Financial Officer concluded that as of March 31, 2008, the end of period
covered by this report, our disclosure controls and procedures were effective
at
the reasonable assurance level to alert him 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 March 31, 2008,
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, 2007.
Item
5. Other Matters
Not
applicable.
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:
May 14, 2007
|
/S/
Gregory Turnbull
|
|
|
Gregory
Turnbull
|
||
|
President,
Chief Executive Officer and Interim Chief Financial
Officer
|
17
Exhibit
31
SECTION
302 CERTIFICATIONS
Certifications:
I,
Gregory H. Turnbull, certify that:
|
1.
|
I
have reviewed this quarterly report on Form 10-Q of A.P. Pharma,
Inc.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
I
am responsible for establishing and maintaining disclosure controls
and
procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for
the registrant and have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under my supervision, to ensure
that material information relating to the registrant is made known
to us
by others, particularly during the period in which this report is
being
prepared;
|
|
b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under my supervision
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
c)
|
Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report my conclusions about the effectiveness
of the
disclosure controls and procedures, as of the end of the period covered
by
this report based on such evaluation;
and
|
|
d)
|
Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely
to
materially affect, the registrant's internal control over financial
reporting; and
|
5. I
have disclosed, based on my most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee
of registrant's board of directors:
|
a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which could
be
reasonably likely to adversely affect the registrant's ability to
record,
process, summarize and report financial information;
and
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control
over financial reporting.
|
Date:
May
14, 2008
/s/
Gregory H.
Turnbull
Gregory
H. Turnbull
President,
Chief Executive Officer and Interim Chief Financial Officer
Exhibit
32
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of A.P. Pharma, Inc. (the "Company") on
Form 10-Q for the period ending March 31, 2008 as filed with the Securities
and
Exchange Commission on the date hereof (the "Report"), I, Gregory H. Turnbull,
President, Chief Executive Officer and Interim Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1)
|
The
Report fully complies with the requirements of section 13(a) or 15(d)
of
the Securities Exchange Act of 1934;
and
|
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
|
March
14,
2008
/s/
Gregory H.
Turnbull
Gregory
H. Turnbull,
President,
Chief Executive Officer and Interim Chief Financial Officer