Business Context and Reporting Period
This Form 10-Q is for A.P. Pharma, Inc. (not Heron Therapeutics), for the quarter ended March 31, 2012. A.P. Pharma is a specialty pharmaceutical company developing products using its Biochronomer polymer-based drug-delivery technology. Its principal program is APF530, a long-acting granisetron formulation for prevention of chemotherapy-induced nausea and vomiting.
The FDA issued a Complete Response Letter for APF530 in March 2010. Management expected to resubmit the NDA in mid-2012. Development of APF112 and APF580 remained deferred while resources were concentrated on APF530.
Financial Metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Contract revenue | $0 | $395,000 |
| Research and development expense | $3.329 million | $1.141 million |
| General and administrative expense | $1.440 million | $569,000 |
| Operating loss | $4.769 million | $1.315 million |
| Net loss | $4.921 million | $1.419 million |
| Net loss per share | $0.02 | $0.04 |
| Net cash used in operating activities | $4.107 million | $1.024 million |
| Capital expenditures | $423,000 | $0 |
At March 31, 2012, cash and cash equivalents were $13.444 million, versus $17.974 million at December 31, 2011. Total assets were $14.994 million and total liabilities were $3.361 million. The accumulated deficit was $165.160 million.
The company had approximately $1.597 million of convertible-note principal outstanding at March 31, 2012, with a carrying value of $143,000 after a $1.454 million debt discount. The notes bear interest at 6% and are secured by substantially all company assets. Operating lease obligations totaled approximately $3.5 million, including $700,000 due within one year.
Material Changes Versus the Prior Comparable Period
- Contract revenue declined to zero following Merial’s termination of its development agreement in May 2011.
- Research and development expense increased by $2.188 million, primarily because of higher APF530 project spending, personnel costs and stock-based compensation related to FDA response activities.
- General and administrative expense increased by $871,000 because of higher consulting, professional-fee and stock-compensation costs.
- Net loss increased by $3.502 million, and operating cash usage increased by $3.083 million.
- Stock-based compensation increased to $778,000 from $239,000.
- Cash declined by $4.530 million during the quarter, including $423,000 of property and equipment purchases.
Guidance, Outlook, Risks and Unusual Items
Management expected 2012 research and development and general and administrative expenses to exceed 2011 levels because of APF530 NDA-resubmission activities. The company stated that existing capital was expected to fund planned operations into 2013, but it did not have sufficient resources to launch APF530 independently. Additional funding or a commercialization partner would be required for a standalone launch.
On May 8, 2012, after the reporting date, the company received $3.0 million from the issuance of additional senior secured convertible notes. Including this financing, pro forma cash was approximately $16.4 million at March 31, 2012. The full $4.5 million note commitment had been issued. If all notes were converted, the company would issue 112.5 million common shares.
The holders may require prepayment of the notes beginning May 2, 2012, subject to the note terms. The company also had 84.127 million warrants outstanding and 52.363 million options outstanding at March 31, 2012, creating substantial potential dilution.
Discontinued operations included a $91,000 loss related to a gross-profit guarantee from the previously sold cosmeceutical and toiletry business. A $1.173 million accrued disposition-cost liability was recorded for the disputed amount claimed by Amcol; the dispute had been submitted to an independent accountant for resolution.
Key risks include additional FDA requirements, failure to obtain APF530 approval, commercialization and market-acceptance risk, dependence on additional financing or partnerships, potential dilution, intellectual-property risk, note repayment obligations and uncertainty regarding the Amcol guarantee. The company reported no off-balance-sheet arrangements and stated that disclosure controls were effective.
Investor Verification Items
- Confirm the filing registrant and ticker, because the provided metadata identifies Heron Therapeutics while the filing is for A.P. Pharma, Inc.
- Verify the timing and outcome of the planned mid-2012 APF530 NDA resubmission.
- Assess whether the $3.0 million post-quarter financing and related conversion terms materially affect liquidity, secured debt and dilution.
- Review the FDA Complete Response Letter issues and remaining regulatory, clinical and manufacturing requirements.
- Monitor the Amcol gross-profit-guarantee dispute and the potential payment beyond the $1.173 million accrued liability.
- Evaluate whether cash resources and potential partnerships are sufficient to fund APF530 commercialization and ongoing operating losses.