View Filing Data

Document and Entity Information - shares	6 Months Ended
Document and Entity Information - shares	Jun. 30, 2012	Jul. 31, 2012
Document And Entity Information
Entity Registrant Name	AP PHARMA INC /DE/
Entity Central Index Key	0000818033
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		302,205,555
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2012

Condensed Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 12,442	$ 17,974
Prepaid expenses and other current assets	557	266
Total current assets	12,999	18,240
Property and equipment, net	1,102	1,075
Other long-term assets	130	130
Total assets	14,231	19,445
Current liabilities:
Accounts payable	605	1,010
Accrued expenses	1,056	1,498
Accrued disposition costs	1,216	1,082
Convertible notes payable to related parties, net of discount	239	103
Total current liabilities	3,116	3,693
Stockholders' equity:
Common stock	2,004	2,002
Additional paid-in capital	178,840	173,989
Accumulated deficit	(169,729)	(160,239)
Total stockholders' equity	11,115	15,752
Total liabilities and stockholders' equity	$ 14,231	$ 19,445

Condensed Statements of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Income Statement [Abstract]
Contract revenue		$ 251		$ 646
Operating expenses:
Research and development	3,067	1,282	6,396	2,423
General and administrative	1,313	509	2,753	1,078
Total operating expenses	4,380	1,791	9,149	3,501
Operating loss	(4,380)	(1,540)	(9,149)	(2,855)
Interest expense, net	(146)	(263)	(207)	(264)
Loss from continuing operations	(4,526)	(1,803)	(9,356)	(3,119)
Loss from discontinued operations	(43)	(129)	(134)	(232)
Net loss	$ (4,569)	$ (1,932)	$ (9,490)	$ (3,351)
Basic and diluted net loss per share:
Decrease from continuing operations	$ (0.02)	$ (0.05)	$ (0.05)	$ (0.08)
Net loss	$ (0.02)	$ (0.05)	$ (0.05)	$ (0.08)
Shares used to compute basic and diluted net loss per share	200,112	40,016	200,079	40,062

Condensed Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash flows from operating activities:
Net loss	$ (9,490)	$ (3,351)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from discontinued operations	134	232
Depreciation and amortization	94	94
Stock-based compensation	1,793	345
Amortization of debt discount	136	25
Changes in operating assets and liabilities:
Accounts receivable		110
Prepaid expenses and other current assets	(291)	(192)
Accounts payable	(74)	130
Accrued expenses	(380)	291
Deferred revenue		(272)
Net cash used in operating activities	(8,078)	(2,588)
Cash flows from investing activities:
Purchases of property and equipment	(467)
Net cash used in investing activities	(467)
Cash flows from financing activities:
Advance proceeds from private placement units		20,300
Proceeds from convertible note financing	3,000	1,500
Proceeds from the issuance of shares under the Employee Stock Purchase Plan	13	10
Net cash provided by financing activities	3,013	21,810
Net increase (decrease) in cash and cash equivalents	(5,532)	19,222
Cash and cash equivalents, beginning of period	17,974	2,109
Cash and cash equivalents, end of period	$ 12,442	$ 21,331

(1) BUSINESS AND BASIS OF PRESENTATION

6 Months Ended

Jun. 30, 2012

(1) BUSINESS AND BASIS OF PRESENTATION

(1) BUSINESS AND BASIS OF PRESENTATION

A.P. Pharma, Inc. (the "Company," "we," "us" and "our") is a specialty pharmaceutical company developing products using its proprietary Biochronomer^TM polymer-based drug delivery platform. This drug delivery platform is designed to improve the therapeutic profile of injectable pharmaceuticals by converting them from products that must be injected once or twice per day to products that need to be injected only once every one or two weeks.

The Company’s lead product candidate, APF530, is being developed for the prevention of both acute- and delayed-onset chemotherapy-induced nausea and vomiting (CINV). One of the most debilitating side effects of cancer chemotherapy, CINV is a leading cause of premature discontinuation of treatment. There is only one injectable 5-HT3 antagonist approved for the prevention of delayed-onset CINV, so this indication represents an area of particular unmet medical need. APF530 contains the 5-HT3 antagonist granisetron formulated in the Company’s proprietary Biochronomer™ drug delivery system, which allows therapeutic drug levels to be maintained for five days with a single subcutaneous injection. This five-day range is designed to cover the delayed phase of CINV, whereas currently available intravenous and oral formulations of granisetron are approved only for the prevention of acute-onset CINV. Granisetron was selected for APF530 because it is widely prescribed by physicians based on a well-established record of safety and efficacy.

In May 2009, we filed a New Drug Application (NDA) with the U.S. Food and Drug Administration (FDA) seeking approval for APF530. The FDA issued a Complete Response Letter for APF530 in March 2010. We have been working to address the issues raised by the FDA and met with the FDA in February and March 2011 to clarify the work needed to resubmit the NDA. Based on our discussions with the FDA and our assessment of the work remaining, we plan to resubmit our NDA to the FDA in September 2012.

We own worldwide rights to APF530 and are in the early stages of building the commercial infrastructure necessary to commercialize APF530 in the U.S. on our own. We are seeking corporate partners to commercialize APF530 in markets outside of the U.S.

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 8 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. We have evaluated subsequent events through the date that these financial statements were issued. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or for any other period. The condensed balance sheet as of December 31, 2011 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 unaudited 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, 2011 filed with the Securities and Exchange Commission (SEC) on March 26, 2012 (2011 10-K).

Liquidity

We have incurred significant operating losses and negative cash flows from operations and have an accumulated deficit of $169.7 million as of June 30, 2012. During 2011, we entered into two financing agreements, which provided us capital to fund operations. In April 2011, we entered into definitive agreements for a convertible note financing, which served as a bridge loan to fund the Company's operations until additional financing was secured. The initial cash received from the bridge loan financing was approximately $1.3 million, net of issuance costs. In June 2011, we entered into definitive agreements for a private placement of units, which comprised of common stock and warrants. The unit financing, which closed in July 2011, provided the Company with approximately $22.8 million of proceeds, net of issuance costs. In May 2012, we received $3.0 million of cash through the issuance of additional convertible notes as a result of the purchasers who participated in the April 2011 convertible note financing exercising their rights to purchase additional convertible notes. As of June 30, 2012, we had cash and cash equivalents of $12.4 million. In July 2012, the Company closed a common stock financing whereby the Company received approximately $53.6 million of proceeds, prior to deducting issuance costs (See Note 11). The Company believes that its current capital is sufficient to fund its planned operations through the anticipated product launch of APF530 in 2013.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP 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 materially from those estimates. We evaluate our critical accounting policies and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our 2011 10-K.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2012, as compared to the recent accounting pronouncements described in our 2011 10-K, that are of significance, or potential significance to us.

(2) CASH EQUIVALENTS

6 Months Ended

Jun. 30, 2012

CASH EQUIVALENTS

(2) CASH EQUIVALENTS

(2) CASH EQUIVALENTS

Our available-for-sale securities as of June 30, 2012 and December 31, 2011 consisted of money market funds primarily containing U.S. government-backed securities, with original maturities of ninety days or less. The carrying value of our money market funds is included in cash equivalents and approximates their fair value. The Company's bank accounts have been placed under a control agreement in accordance with the April 2011 convertible note financing (see Note 9).

- Definition

The entire disclosure for cash and cash equivalent footnotes, which may include the types of deposits and money market instruments, applicable carrying amounts, restricted amounts and compensating balance arrangements. Cash and equivalents include: (1) currency on hand (2) demand deposits with banks or financial institutions (3) other kinds of accounts that have the general characteristics of demand deposits (4) short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments maturing within three months from the date of acquisition qualify.

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+ Details

(3) FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2012

FAIR VALUE MEASUREMENTS

(3) FAIR VALUE MEASUREMENTS

(3) FAIR VALUE MEASUREMENTS

The three-tier fair value hierarchy utilized prioritizes the inputs used in measuring fair value as follows: Level 1) observable inputs such as quoted prices in active markets; Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and Level 3) unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. The hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, we measure our available-for-sale securities at fair value. We used quoted prices in active markets (Level l) to measure the fair value of our cash equivalents on our Condensed Balance Sheets as of June 30, 2012 and December 31, 2011. Cash equivalents consist of highly rated money market funds with maturities of ninety days or less. Due to the high ratings and short-term nature of these funds, we consider the inputs used to value all cash equivalents as Level 1 inputs.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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+ Details

(4) NET LOSS PER SHARE

6 Months Ended

Jun. 30, 2012

NET LOSS PER SHARE

(4) NET LOSS PER SHARE

(4) NET LOSS PER SHARE

Basic and diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the applicable period. Diluted net loss per share excludes the effect of outstanding potentially dilutive securities because they are anti-dilutive. The following table shows the outstanding potentially dilutive options, unvested restricted stock awards, warrants and convertible notes for the six months ended June 30, 2012 and 2011 (in thousands):

	Six Months Ended June 30,
	2012		2011

Options outstanding		63,662		2,139
Warrants outstanding		83,977		3,977
Common stock underlying convertible notes outstanding		115,520		37,500

(5) STOCK-BASED COMPENSATION

6 Months Ended

Jun. 30, 2012

STOCK-BASED COMPENSATION

(5) STOCK-BASED COMPENSATION

(5) STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation expense for all awards (in thousands, except per share amounts):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011

Operating expenses:
Research and development	$	360	$	73	$	664	$	148
General and administrative		655		33		1,129		197
Total stock-based compensation expense	$	1,015	$	106	$	1,793	$	345

Impact on basic and diluted net loss per common share	$	0.01	$	—	$	0.01	$	0.01

The following table summarizes stock option activity for the six months ended June 30, 2012:

						Weighted-
						Average
				Weighted-		Remaining
				Average		Contractual
	Shares			Exercise		Term
	(in thousands)			Price		(Years)

Outstanding at January 1, 2012		50,106		$	0.31		9.42
Granted		14,650		$	0.56
Exercised		—
Expired and forfeited		(1,094	)	$	0.81
Outstanding at June 30, 2012		63,662		$	0.36		8.34

Employee Stock Purchase Plan

We adopted an Employee Stock Purchase Plan (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. In June 2011, our stockholders authorized an increase in the number of shares reserved for issuance under the Purchase Plan by 500,000, for a total of 1,000,000 shares reserved at June 30, 2012. 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 during the six months ended June 30, 2012 and 2011 consisted of 58,571 and 49,486 shares at an average price of $0.21 and $0.20, respectively. Shares available for future purchase under the Purchase Plan were 472,605 at June 30, 2012.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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+ Details

(6) COMPREHENSIVE LOSS

6 Months Ended

Jun. 30, 2012

COMPREHENSIVE LOSS

(6) COMPREHENSIVE LOSS

(6) COMPREHENSIVE LOSS

Comprehensive loss for the periods reported was comprised solely of our net loss. The comprehensive loss for the three and six months ended June 30, 2012 was $4.6 million and $9.5 million, respectively. The comprehensive loss for the three and six months ended June 30, 2011 was $1.9 million and $3.4 million, respectively. There were no other changes in equity that were excluded from our net loss for all periods.

- Definition

The entire disclosure for comprehensive income, which includes, but is not limited to, 1) the amount of income tax expense or benefit allocated to each component of other comprehensive income, including reclassification adjustments, 2) the reclassification adjustments for each classification of other comprehensive income and 3) the ending accumulated balances for each component of comprehensive income.

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Reference 8: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Glossary Reclassification Adjustments
-URI http://asc.fasb.org/extlink&oid=6522872

Reference 9: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
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Reference 10: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 130
-Paragraph 14-26
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

+ Details

(7) DISCONTINUED OPERATIONS

6 Months Ended

Jun. 30, 2012

DISCONTINUED OPERATIONS

(7) DISCONTINUED OPERATIONS

(7) DISCONTINUED OPERATIONS

Cosmeceutical and Toiletry Business

On July 25, 2000, we completed the sale of certain technology rights for our cosmeceutical and toiletry business to RP Scherer Corporation (RP Scherer), a subsidiary of Cardinal Health, Inc. Under the terms of the agreement with RP Scherer, we guaranteed a minimum gross profit percentage on RP Scherer's combined sales of products to Ortho Dermatologics (Ortho) and Dermik Laboratories, Inc. (Dermik) (Gross Profit Guaranty). In July 2011, Valeant Pharmaceuticals announced that it was acquiring both Ortho and Dermik. The guaranty period initially commenced on July 1, 2000 and was to end on the earlier of: (i) July 1, 2010; or (ii) the end of two consecutive guaranty periods where the combined gross profit on sales to Ortho and Dermik equaled or exceeded the guaranteed gross profit (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, in order 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. Amcol has indicated that its costs to produce the products differ from those it historically charged to the RP Scherer successor company. We have requested documentation from Amcol to substantiate actual costs. Until we receive confirmation of these amounts, we have accrued the full amount Amcol represents it is currently owed. As there is no minimum amount of Gross Profit Guaranty due, no accrual for the guaranty is estimable for future years. A liability of $1.2 million related to the current amount due under the Gross Profit Guaranty is recorded as accrued disposition costs on our Condensed Balance Sheet as of June 30, 2012. To date, we have not paid this amount, due to our inability to substantiate the amounts claimed by Amcol. As of the date of filing of this report, our dispute with Amcol over the Gross Profit Guaranty has been submitted to an independent accountant for resolution.

The cosmeceutical and toiletry business is reported as discontinued operations for all periods presented in our accompanying Condensed Statements of Operations.

Loss from discontinued operations primarily represents 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						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Cosmeceutical and Toiletry Business	$	(43	)	$	(129	)	$	(134	)	$	(232	)
Change in estimates for gross profit guarantees

There was no material basic and diluted loss per common share resulting from discontinued operations for the three and six months ended June 30, 2012 and 2011.

- Definition

Disclosure of accounting policy for any discontinued operations. The results of operations of a component of an entity that either has been disposed of or is classified as held for sale is reported in discontinued operations if both: (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. If the entity elects to allocate interest expense to a discontinued operation, it may disclose its accounting policy for this election and describe its method of allocation.

+ References + Details

(8) SIGNIFICANT AGREEMENTS

6 Months Ended

Jun. 30, 2012

SIGNIFICANT AGREEMENTS

(8) SIGNIFICANT AGREEMENTS

(8) SIGNIFICANT AGREEMENTS

Merial Limited

In September 2009, we entered into a world-wide license and development agreement with Merial Limited (Merial), a leading animal health company, for a long-acting pain management product for cats and dogs. Under the terms of the agreement, we received a nonrefundable upfront license fee and would receive development funding and potential future milestones, in addition to royalties following commercialization. Under the license and development agreement, we were obligated to perform reimbursable development services and provide any improvements related to the licensed technology during the six-year development period. We recognized the upfront license fee ratably over the development period, and recognized revenue from the development services when the services were rendered.

In May 2011, we received notice of termination from Merial due to their concerns about the commercial potential of the product under development in the animal health market. We recognized $0.0 and $0.1 million of revenue related to development services provided to Merial in the three months ended June 30, 2012 and 2011, respectively, and $0.0 and $0.5 million of revenue for the six months ended June 30, 2012 and 2011, respectively. The remaining balance of deferred revenue related to the upfront license fee of $0.1 million was recognized as revenue in the quarter ended June 30, 2011, upon termination of the licensing agreement by Merial.

- Definition

Tabular disclosure of significant agreements under research and development arrangements accounted for as a contract to perform research and development for others (including royalty arrangements, purchase provisions, license agreements, and commitments to provide additional funding), aggregated by similar arrangements or individually if necessary to understand the effects on the financial statements. Include also the amount of costs incurred under a research and development arrangement accounted for as a contract to perform research and development for others. Aggregation of similar arrangements by type may be appropriate. Include also the amount of compensation earned (contract income) under a research and development arrangement accounted for as a contract to perform research and development for others. Aggregation of similar arrangements by type may be appropriate.

+ References + Details

(9) CONVERTIBLE NOTES TO RELATED PARTIES

6 Months Ended

Jun. 30, 2012

CONVERTIBLE NOTES TO RELATED PARTIES

(9) CONVERTIBLE NOTES TO RELATED PARTIES

(9) CONVERTIBLE NOTES TO RELATED PARTIES

In April 2011, we entered into a Securities Purchase Agreement (Purchase Agreement) with certain institutional investors (Purchasers), including a fund affiliated with Kevin C. Tang, who is one of our directors, for a private placement of up to $4.5 million in Senior Secured Convertible Notes due 2021 (Notes). The Purchase Agreement provided for the Purchasers to purchase $1.5 million aggregate principal amount of Notes at the initial closing. Pursuant to the Purchase Agreement, the Purchasers had the option to purchase an additional $3.0 million aggregate principal amount of Notes at any time until May 2, 2013 (Purchase Option). The Notes are convertible into shares of the Company's common stock at a rate of 25,000 shares for every $1,000 of principal and accrued interest due under the Notes (Conversion Shares).

The cash received from the initial closing of the Note financing, which resulted in the issuance of $1.5 million aggregate principal amount of Notes, was approximately $1.3 million, net of issuance costs. In May 2012, the Purchasers exercised their Purchase Option, and we received $3.0 million of cash through the issuance of the remaining $3.0 million aggregate principal amount of Notes. As a result of the exercise of the Purchase Option, the Purchasers have purchased the full amount of Notes that the Company was obligated to sell under the Purchase Agreement. If the $4.5 million principal amount of Notes are converted, the Company would issue 112.5 million shares of its common stock.

The Notes are secured by substantially all of the assets of the Company, including placing our bank accounts under a control agreement. The Notes initially bore interest at 20% per annum, payable quarterly in cash or in additional principal amount of Notes at the election of the Purchasers. In June 2011, the Notes were amended to reduce the interest rate to 6% per annum effective July 1, 2011. The Notes mature on May 2, 2021; however, the holders of the Notes may require prepayment of the Notes at any time beginning on or after May 2, 2012, at each holder's option.

There is no right to convert the Notes to the extent that, after giving effect to such conversion, the holder would beneficially own in excess of 9.99% of the Company's outstanding common stock. Each holder of the Notes can increase or decrease this beneficial ownership conversion limit by written notice to the Company, which will not be effective until 61 days after delivery of the notice.

The Company is in compliance with all debt-related covenants at June 30, 2012. Upon the occurrence of an event of default under the Notes, the holders of the Notes have the right to require the Company to redeem all or a portion of their Notes.

Pursuant to the Purchase Agreement, the Company agreed to file a registration statement registering the Conversion Shares for resale. In May 2011, the Company filed a registration statement on Form S-1 registering these shares for resale. The registration statement was declared effective on July 29, 2011. For the Notes issued in May 2012, the Purchasers have agreed to waive their right to require the Company to register the shares underlying the additional Notes until they provide notice otherwise.

Concurrent with the approval of the offer and sale of the Notes, our board of directors approved the termination of the Company's Preferred Shares Rights Agreement (Rights Agreement), effective immediately prior to the Purchase Agreement’s initial closing date. Under the Rights Agreement, preferred stock purchase rights were distributed to stockholders of record as of January 2, 2007 and to each person who acquires the Company’s common stock thereafter. The rights were 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 (34% for Tang Capital Partners, LP and 30% for Baker Brothers Investments) of the outstanding shares of the Company's common stock. These rights were terminated as a result of the termination of the Rights Agreement. The Rights Agreement had not been triggered as of that date.

The Notes contain an embedded conversion feature that was in-the-money on both issuance dates. Based on an effective fixed conversion rate of 25,000 shares for every $1,000 of principal and accrued interest due under the Notes, the total conversion benefit at issuance exceeded the loan proceeds. Therefore, a full debt discount was recorded in an amount equal to the face value of the Notes on the issuance dates, and the Company began amortizing the resultant debt discount over the respective 10-year or remaining term of the Notes. During the three and six months ended June 30, 2012, accrued interest of approximately $24,000 and $48,000 was paid-in-kind and rolled into the principal balance of the Notes, which resulted in an additional full debt discount for the respective periods. For the three and six months ended June 30, 2012, interest expense relating to the stated rate of the Notes was approximately $51,000 and $75,000, respectively. Interest expense relating to the amortization of debt discount for the three and six months ended June 30, 2012 was approximately $96,000 and $136,000, respectively.

As of June 30, 2012, the carrying value of the Notes was approximately $239,000, which is comprised of the $4,621,000 principal amount of the Notes outstanding, less debt discount of $4,381,000. Accrued interest on the principal balance was $51,000 at June 30, 2012.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References + Details

(10) STOCKHOLDERS' EQUITY

6 Months Ended

Jun. 30, 2012

Stockholders' equity:

(10) STOCKHOLDERS' EQUITY

(10) STOCKHOLDERS' EQUITY

Amendments to Articles of Incorporation

In June 2011, we amended our certificate of incorporation to increase the number of shares of authorized common stock to 1,500,000,000, par value $0.01 per share. Prior to the amendment, the number of shares of authorized common stock was 100,000,000, par value $0.01 per share. The certificate of amendment was approved by a majority of our stockholders on June 29, 2011.

Stock Plans

At our annual meeting in June 2011, our stockholders approved an amendment to our 2007 Equity Incentive Plan to increase the maximum number of shares of common stock available for grant by 90,000,000 shares of common stock, resulting in an aggregate of 95,000,000 shares of common stock authorized for issuance pursuant to awards granted under our 2007 Equity Incentive Plan. The stockholders also approved an amendment to our 1997 Employee Stock Purchase Plan to increase the number of shares of common stock reserved for issuance under the plan by 500,000, for a total of 1,000,000 shares reserved as of June 30, 2012.

Private Placement

In June 2011, the Company entered into a securities purchase agreement with certain purchasers (Securities Purchase Agreement), pursuant to which the Company agreed to sell for an aggregate price of $24.0 million, 160,000,006 shares of its common stock (Shares) and warrants to purchase 80,000,005 shares of its common stock (Warrants) at an exercise price of $0.18 per share (Private Placement). The Private Placement closed on July 1, 2011. For each Share purchased, the investors received one Warrant to purchase 0.5 shares of common stock (together with a Share, a Unit), at a purchase price of $0.15 per Unit. The Warrants were immediately exercisable and expire on the fifth anniversary of the closing date of July 1, 2011. The Warrants may be exercised for cash only or, if a registration statement is not then effective and available for the resale of the shares of common stock issuable upon exercise of the Warrants, by surrender of such Warrant, or a portion of such Warrant, by way of cashless exercise. There is no right to exercise the Warrants to the extent that after giving effect to such exercise the holder would beneficially own in excess of 9.99% of our outstanding shares of common stock (or such other limit as may be designated by any particular purchaser). Each holder of the Warrants can amend or waive the foregoing limitation by written notice to the Company, with such waiver taking effect only upon the expiration of a 61-day notice period.

Under the terms of the Securities Purchase Agreement, on July 29, 2011, the Company filed a registration statement with the SEC to register for resale the Shares and the shares of common stock issuable upon the exercise of the Warrants (collectively, the Registrable Securities). The registration statement was declared effective on August 4, 2011. If the Company fails to keep the registration statement continuously effective for a designated time (with limited exceptions), the Company may be obligated to pay to the holders of the Registrable Securities liquidated damages in an amount equal to 1.0% per month of such holder's pro rata interest in the total purchase price of the Private Placement.

The Company received advance proceeds of approximately $20.3 million as of June 30, 2011. The remaining $3.7 million was received in July 2011 when the Private Placement closed. Total proceeds were recorded net of issuance costs of approximately $1.2 million. The Shares and Warrants were recorded as equity at their fair values on the issuance date.

- Definition

The entire disclosure for shareholders' equity, comprised of portions attributable to the parent entity and noncontrolling interest, if any, including other comprehensive income (as applicable). Including, but not limited to: (1) balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings; (2) accumulated balance for each classification of other comprehensive income and total amount of comprehensive income; (3) amount and nature of changes in separate accounts, including the number of shares authorized and outstanding, number of shares issued upon exercise and conversion, and for other comprehensive income, the adjustments for reclassifications to net income; (4) rights and privileges of each class of stock authorized; (5) basis of treasury stock, if other than cost, and amounts paid and accounting treatment for treasury stock purchased significantly in excess of market; (6) dividends paid or payable per share and in the aggregate for each class of stock for each period presented; (7) dividend restrictions and accumulated preferred dividends in arrears (in aggregate and per share amount); (8) retained earnings appropriations or restrictions, such as dividend restrictions; (9) impact of change in accounting principle, initial adoption of new accounting principle and correction of an error in previously issued financial statements; (10) shares held in trust for Employee Stock Ownership Plan (ESOP); (11) deferred compensation related to issuance of capital stock; (12) note received for issuance of stock; (13) unamortized discount on shares; (14) description, terms, and number of warrants or rights outstanding; (15) shares under subscription and subscription receivables, effective date of new retained earnings after quasi-reorganization and deficit eliminated by quasi-reorganization and, for a period of at least ten years after the effective date, the point in time from which the new retained dates; and (16) retroactive effective of subsequent change in capital structure.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
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-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 15: http://www.xbrl.org/2003/role/presentationRef
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+ Details

(11) SUBSEQUENT EVENTS

6 Months Ended

Jun. 30, 2012

SUBSEQUENT EVENTS

(11) SUBSEQUENT EVENTS

(11) SUBSEQUENT EVENTS

On July 25, 2012, the Company entered into a securities purchase agreement with certain purchasers, pursuant to which the Company agreed to sell 102,000,000 shares of its common stock for an aggregate price of approximately $53.6 million, at a purchase price of $0.525 per share of common stock (2012 Private Placement). The 2012 Private Placement closed on July 30, 2012. The proceeds to the Company from the offering, net of selling commissions, were approximately $50.7 million.

(1) BUSINESS AND BASIS OF PRESENTATION (Policies)	6 Months Ended
(1) BUSINESS AND BASIS OF PRESENTATION (Policies)	Jun. 30, 2012
Organization and Business	A.P. Pharma, Inc. (the "Company," "we," "us" and "our") is a specialty pharmaceutical company developing products using its proprietary BiochronomerTM polymer-based drug delivery platform. This drug delivery platform is designed to improve the therapeutic profile of injectable pharmaceuticals by converting them from products that must be injected once or twice per day to products that need to be injected only once every one or two weeks. The Company's lead product candidate, APF530, is being developed for the prevention of both acute- and delayed-onset chemotherapy-induced nausea and vomiting (CINV). One of the most debilitating side effects of cancer chemotherapy, CINV is a leading cause of premature discontinuation of treatment. There is only one injectable 5-HT3 antagonist approved for the prevention of delayed-onset CINV, so this indication represents an area of particular unmet medical need. APF530 contains the 5-HT3 antagonist granisetron formulated in the Company's proprietary Biochronomer™ drug delivery system, which allows therapeutic drug levels to be maintained for five days with a single subcutaneous injection. This five-day range is designed to cover the delayed phase of CINV, whereas currently available intravenous and oral formulations of granisetron are approved only for the prevention of acute-onset CINV. Granisetron was selected for APF530 because it is widely prescribed by physicians based on a well-established record of safety and efficacy. In May 2009, we filed a New Drug Application (NDA) with the U.S. Food and Drug Administration (FDA) seeking approval for APF530. The FDA issued a Complete Response Letter for APF530 in March 2010. We have been working to address the issues raised by the FDA and met with the FDA in February and March 2011 to clarify the work needed to resubmit the NDA. Based on our discussions with the FDA and our assessment of the work remaining, we plan to resubmit our NDA to the FDA in September 2012. We own worldwide rights to APF530 and are in the early stages of building the commercial infrastructure necessary to commercialize APF530 in the U.S. on our own. We are seeking corporate partners to commercialize APF530 in markets outside of the U.S.
Basis of Presentation	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 8 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. We have evaluated subsequent events through the date that these financial statements were issued. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or for any other period. The condensed balance sheet as of December 31, 2011 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 unaudited 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, 2011 filed with the Securities and Exchange Commission (SEC) on March 26, 2012 (2011 10-K).
Liquidity	Liquidity We have incurred significant operating losses and negative cash flows from operations and have an accumulated deficit of $169.7 million as of June 30, 2012. During 2011, we entered into two financing agreements, which provided us capital to fund operations. In April 2011, we entered into definitive agreements for a convertible note financing, which served as a bridge loan to fund the Company's operations until additional financing was secured. The initial cash received from the bridge loan financing was approximately $1.3 million, net of issuance costs. In June 2011, we entered into definitive agreements for a private placement of units, which comprised of common stock and warrants. The unit financing, which closed in July 2011, provided the Company with approximately $22.8 million of proceeds, net of issuance costs. In May 2012, we received $3.0 million of cash through the issuance of additional convertible notes as a result of the purchasers who participated in the April 2011 convertible note financing exercising their rights to purchase additional convertible notes. As of June 30, 2012, we had cash and cash equivalents of $12.4 million. In July 2012, the Company closed a common stock financing whereby the Company received approximately $53.6 million of proceeds, prior to deducting issuance costs (See Note 11). The Company believes that its current capital is sufficient to fund its planned operations through the anticipated product launch of APF530 in 2013.
Critical Accounting Policies and Estimates	Critical Accounting Policies and Estimates The preparation of financial statements in conformity with U.S. GAAP 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 materially from those estimates. We evaluate our critical accounting policies and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our 2011 10-K.
Recent Accounting Pronouncements	Recent Accounting Pronouncements There have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2012, as compared to the recent accounting pronouncements described in our 2011 10-K, that are of significance, or potential significance to us.

(4) NET LOSS PER SHARE (Tables)

6 Months Ended

Jun. 30, 2012

Schedule of Antidilutive securities

	Six Months Ended June 30,
	2012		2011

Options outstanding		63,662		2,139
Warrants outstanding		83,977		3,977
Common stock underlying convertible notes outstanding		115,520		37,500

(5) STOCK-BASED COMPENSATION (Tables)

6 Months Ended

Jun. 30, 2012

Stock-based compensation expense

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011

Operating expenses:
Research and development	$	360	$	73	$	664	$	148
General and administrative		655		33		1,129		197
Total stock-based compensation expense	$	1,015	$	106	$	1,793	$	345

Impact on basic and diluted net loss per common share	$	0.01	$	—	$	0.01	$	0.01

Schedule of share-based compensation

						Weighted-
						Average
				Weighted-		Remaining
				Average		Contractual
	Shares			Exercise		Term
	(in thousands)			Price		(Years)

Outstanding at January 1, 2012		50,106		$	0.31		9.42
Granted		14,650		$	0.56
Exercised		—
Expired and forfeited		(1,094	)	$	0.81
Outstanding at June 30, 2012		63,662		$	0.36		8.34

- Definition

Tabular disclosure of components of a stock option or other award plan under which equity-based compensation is awarded to employees, typically comprised of the amount of unearned compensation (deferred compensation cost), compensation expense, and changes in the quantity and fair value of the shares (or other type of equity) granted, exercised, forfeited, and issued and outstanding pertaining to that plan. Disclosure may also include nature and general terms of such arrangements that existed during the period and potential effects of those arrangements on shareholders, effect of compensation cost arising from equity-based payment arrangements on the income statement, method of estimating the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period, cash flow effects resulting from equity-based payment arrangements and, for registrants that accelerate vesting of out of the money share options, reasons for the decision to accelerate.

+ References + Details

(7) DISCONTINUED OPERATIONS (Tables)

6 Months Ended

Jun. 30, 2012

Discontinued operations

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Cosmeceutical and Toiletry Business	$	(43	)	$	(129	)	$	(134	)	$	(232	)
Change in estimates for gross profit guarantees

(4) NET LOSS PER SHARE - Schedule of Antidilutive securities (Details) - shares shares in Thousands	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Options outstanding	63,662	2,139	50,106
Warrants outstanding	83,977	3,977
Common stock underlying convertible notes outstanding	115,520	37,500

(1) BUSINESS AND BASIS OF PRESENTATION (Details Narrative) - USD ($)	1 Months Ended			3 Months Ended
	Jul. 30, 2012	Jul. 31, 2011	Apr. 30, 2011	Jun. 30, 2012
Proceeds from Debt, Net of Issuance Costs			$ 1,300,000
Net Proceeds from issuance of Private Placement		$ 22,800,000
Cash received through the issuance of convertible notes				$ 3,000,000
Proceeds from common stock financing	$ 53,600,000

(5) STOCK-BASED COMPENSATION - Schedule of share-based compensation (Details)	6 Months Ended
	Jun. 30, 2012 Yr $ / shares shares	Jun. 30, 2012 $ / shares
Outstanding, beginning balance	50,106,000
Outstanding, Weighted average exercise price beginning balance \| $ / shares	$ 0.31
Outstanding, Weighted averge remaining contractual term beginning \| Yr	9.42
Granted, Shares	14,650,000
Granted, Weighted average exercise price \| $ / shares	$ 0.56
Exercised, Shares
Expired and forfeited, Shares	(1,094,000)
Expired and forfeited, Weighted average exercise price \| $ / shares	$ 0.81
Outstanding, Ending balance	63,662,000
Outstanding, Weighted average exercise price ending balance \| $ / shares	$ 0.31	$ 0.36
Outstanding, Weighted averge remaining contractual term ending \| Yr	8.34

(5) STOCK-BASED COMPENSATION - Stock-based compensation expense (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Operating expenses:
Research and development	$ 360	$ 73	$ 664	$ 148
General and administrative	655	33	1,129	197
Total stock-based compensation expense	$ 1,015	$ 106	$ 1,793	$ 345
Impact on basic and diluted net loss per common share	$ 0.01		$ 0.01	$ 0.01

(5) STOCK-BASED COMPENSATION (Details Narrative) - $ / shares	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Number of additional shares authorized under Employee Stock Purchase Plan		500,000
Shares reserved for issuance under Employee Stock Purchase Plan	1,000,000
Purchase price percentage of fair market value	85.00%
Sales under the Stock Purchase Plan	58,571	49,486
Average price of shares	$ 0.21	$ 0.20
Shares available for future purchase under the Purchase Plan	472,605

(6) COMPREHENSIVE LOSS (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
(6) COMPREHENSIVE LOSS (Details Narrative) - USD ($)	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Notes to Financial Statements
Comprehensive loss	$ 4,600,000	$ 1,900,000	$ 9,500,000	$ 3,400,000

- Definition

The change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from non-owner sources which are attributable to noncontrolling interests. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, which are directly or indirectly attributable to that ownership interest in subsidiary equity which is not attributable to the parent.

+ References + Details

(7) DISCONTINUED OPERATIONS (Details Narrative)	84 Months Ended
(7) DISCONTINUED OPERATIONS (Details Narrative)	Jun. 30, 2007 USD ($)
Gross profit Guaranty expense	$ 944,000

(8) SIGNIFICANT AGREEMENTS (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Revenue related to development services	$ 0	$ 100,000	$ 0	$ 500,000
Upfront License Fee
Revenue related to development services		$ 100,000		$ 100,000

(9) CONVERTIBLE NOTES TO RELATED PARTIES (Details Narrative) - USD ($)	1 Months Ended		3 Months Ended	6 Months Ended		12 Months Ended
	May 31, 2012	Apr. 30, 2011	Jun. 30, 2012	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jan. 02, 2007
Aggregate principal amount of notes authorized under private placement		$ 4,500,000
Principal amount of notes purchased at initial closing of private placement		1,500,000
Purchase option for additional notes under private placement		$ 3,000,000
Number of shares that can be converted per $1,000 of convertible note principal and accrued interest		25,000
Amount of convertible debt principal and interest that can be exchanged for twenty five thousand common shares		$ 1,000
Net proceeds, issuance of notes		1,300,000
Gross proceeds, issuance of notes	$ 3,000,000	$ 1,500,000
Common shares issuable for convertible debt, $4.5 million principal			112,500,000
Debt instrument interest rate		20.00%				6.00%
Acquisition share percentage relating to preferred share rights							20.00%
Beneficial ownership threshold percentage of the Company's outstanding common stock after conversion of Notes	9.99%	9.99%
Notice period associated with beneficial ownership percentage limitation convertible notes	61 days	61 days
Term of the Notes		10 years
Paid-in kind interest			$ 24,000	$ 48,000
Interest expense relating to the stated rate of the Notes			51,000	75,000
Interest expense relating to the amortization of debt discount			96,000	136,000	$ 25,000
Principal amount of the Notes outstanding			4,621,000	4,621,000		$ 4,621,000
Debt discount			4,381,000	4,381,000		4,381,000
Accrued interest on the principal balance			$ 51,000	$ 51,000		$ 51,000
Tang Capital Partners LP
Acquisition share percentage relating to preferred share rights							34.00%
Baker Brothers Investments
Acquisition share percentage relating to preferred share rights							30.00%

(10) STOCKHOLDERS' EQUITY (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands	1 Months Ended	2 Months Ended	6 Months Ended
	Jul. 31, 2011	Jul. 31, 2011	Jun. 30, 2011	Jun. 30, 2012	Jun. 29, 2011
Authorized common stock			1,500,000,000		100,000,000
Par value			$ 0.01		$ 0.01
Number of additional shares authorized under 1997 Employee Stock Purchase Plan			500,000
Shares reserved for issuance under 1997 Employee Stock Purchase Plan				1,000,000
Number of additional shares authorized under 2007 Equity Incentive Plan			90,000,000
Shares reserved for issuance under 2007 Equity Incentive Plan				95,000,000
Stock issued during period, equity unit financing	160,000,006
Issuable common shares linked to warrants sold as components of PIPE units	80,000,005
Exercise price per share for Warrants			$ 0.18
Number of shares that can be purchased with one warrant			0.5
Purchase price per unit			$ 0.15
Liquidated damages % for Registrable Securities			1.00%
Beneficial ownership threshold percentage of the Company's outstanding common stock after exercise of warrants associated with PIPE financing			9.99%
Notice period associated with beneficial ownership percentage limitation for warrant exercise			61 days
Gross proceeds from equity unit financing	$ 3,700	$ 24,000	$ 20,300
Payments of stock issuance costs	$ 1,200	$ 1,200

(11) SUBSEQUENT EVENTS (Details Narrative) $ / shares in Units, $ in Thousands	1 Months Ended
	Jul. 30, 2012 USD ($) $ / shares shares
Common stock issued \| shares	102,000,000
Gross proceeds from issuance of private placement	$ 53,600
Per share purchase price of common stock \| $ / shares	$ 0.525
Proceeds from Private Placement net of selling commissions	$ 50,700