A.P. Pharma, Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2012. The filing identifies the registrant as A.P. Pharma, Inc.; the request metadata identifies Heron Therapeutics, Inc.
Business Context and Reporting Period
A.P. Pharma was a specialty pharmaceutical company developing injectable drug-delivery products using its Biochronomer platform. Its lead candidate, APF530, was being developed to prevent acute- and delayed-onset chemotherapy-induced nausea and vomiting. The FDA issued a Complete Response Letter in March 2010, and management planned to resubmit the APF530 NDA in September 2012.
The company had no approved commercial product described in the filing and was in the early stages of building U.S. commercialization infrastructure. It was seeking partners for markets outside the United States.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Contract revenue | $0 million, versus $0.3 million in 2011 | $0 million, versus $0.6 million in 2011 |
| Research and development expense | $3.1 million, versus $1.3 million | $6.4 million, versus $2.4 million |
| General and administrative expense | $1.3 million, versus $0.5 million | $2.8 million, versus $1.1 million |
| Operating loss | $4.4 million, versus $1.5 million | $9.1 million, versus $2.9 million |
| Net loss | $4.6 million, versus $1.9 million | $9.5 million, versus $3.4 million |
| Net loss per share | $0.02, versus $0.05 | $0.05, versus $0.08 |
| Net cash used in operating activities | Not separately provided | $8.1 million, versus $2.6 million |
Because revenue was zero in 2012, operating and net profit margins were not meaningful. Stock-based compensation was $1.0 million for the quarter and $1.8 million for the six-month period, compared with $0.1 million and $0.3 million, respectively, in the prior-year periods.
At June 30, 2012, cash and cash equivalents were $12.4 million, down from $18.0 million at December 31, 2011. Total assets were $14.2 million and stockholders’ equity was $11.1 million. Current liabilities were $3.1 million. Convertible notes had a $4.6 million principal balance and a $0.2 million carrying value after a $4.4 million debt discount. The notes were secured, bore 6% interest, matured in 2021, and holders could require prepayment beginning May 2, 2012.
Material Changes Versus the Prior Comparable Period
- Contract revenue declined to zero following Merial’s termination of its development agreement in May 2011.
- Six-month research and development expense increased $4.0 million, primarily because of higher APF530 project spending, headcount-related costs, and stock-based compensation associated with addressing FDA requirements.
- Six-month general and administrative expense increased $1.7 million, primarily due to higher stock-based compensation, consulting costs, and professional fees.
- Six-month operating cash burn increased by $5.5 million to $8.1 million.
- The company received $3.0 million in May 2012 from issuance of additional convertible notes. In July 2012, after quarter-end, it completed a common-stock financing that generated approximately $53.6 million before issuance costs, or approximately $50.7 million net of selling commissions.
- Weighted-average shares used for per-share calculations increased to approximately 200.1 million from approximately 40.1 million, reflecting significant equity issuance and recapitalization activity.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected 2012 research and development and general and administrative expenses to exceed 2011 levels because of NDA-resubmission activities.
- Management believed available capital, including the July 2012 financing, was sufficient to fund planned operations through the anticipated APF530 launch in 2013. This outlook depended on regulatory progress, launch costs, development spending, collaborations, and market conditions.
- The company had an accumulated deficit of $169.7 million and a history of operating losses and negative operating cash flow. Management cautioned that additional financing might be required and might not be available on favorable terms.
- A $1.2 million accrued disposition cost related to a disputed gross-profit guarantee from a previously sold cosmeceutical and toiletry business. The amount had not been paid because the company could not substantiate the counterparty’s claim; the dispute had been submitted to an independent accountant.
- Operating lease obligations totaled approximately $3.3 million, including $0.7 million due within one year.
- The APF530 NDA resubmission, regulatory approval, commercialization timing, clinical and manufacturing requirements, intellectual property protection, partnership development, and the ability to raise capital were identified as material risks.
- The company reported no off-balance-sheet arrangements, no material legal proceedings, and compliance with debt covenants as of June 30, 2012.
Investor Verification Priorities
- Verify the registrant’s corporate identity and any relationship between A.P. Pharma, Inc. and Heron Therapeutics, Inc.
- Confirm the status and outcome of the planned September 2012 APF530 NDA resubmission and subsequent FDA review.
- Reconcile the July 2012 equity financing proceeds with dilution, share count, warrants, and outstanding convertible-note conversion rights.
- Assess cash burn, remaining liquidity, and whether the July financing extended the company’s runway as projected.
- Review the $1.2 million gross-profit-guarantee dispute and any future liability through the stated potential guaranty period ending July 1, 2013.
- Evaluate the effect of stock-based compensation and the substantial increase in shares outstanding on reported per-share results.