A.P. Pharma, Inc. 10-Q Summary — Quarter Ended June 30, 2011
Filing identity: The supplied filing is for A.P. Pharma, Inc., not Heron Therapeutics, Inc. Investors should verify the issuer before relying on this summary. The filing presents unaudited results for the three and six months ended June 30, 2011, compared with the same 2010 periods.
Business Context and Reporting Period
A.P. Pharma is a specialty pharmaceutical company developing products using its Biochronomer polymer-based drug-delivery technology. Its primary asset is APF530, a long-acting granisetron product candidate for prevention of chemotherapy-induced nausea and vomiting. The FDA issued a Complete Response Letter for the APF530 NDA in March 2010. Following meetings with the FDA in February and March 2011, management expected to resubmit the NDA in the first half of 2012. Development of other pipeline products was temporarily deferred to focus on APF530.
The financial statements are prepared under U.S. GAAP for interim reporting and are unaudited. The company reported an accumulated deficit of $151.8 million at June 30, 2011.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|---|---|
| Contract revenue | $0.3 million | $0.5 million | $0.6 million | $0.8 million |
| Operating loss | $(1.5) million | $(3.7) million | $(2.9) million | $(6.6) million |
| Loss from continuing operations | $(1.8) million | $(3.7) million | $(3.1) million | $(4.1) million |
| Net loss | $(1.9) million | $(3.6) million | $(3.4) million | $(4.1) million |
| Net loss per share | $(0.05) | $(0.09) | $(0.08) | $(0.10) |
- Approximate operating margins were negative 614% for the quarter and negative 442% for the six-month period, reflecting the company’s development-stage cost structure and low revenue base.
- Research and development expense declined to $1.3 million for the quarter and $2.4 million for six months, from $1.9 million and $4.2 million, respectively, primarily because of lower APF530 project spending before the planned NDA resubmission.
- General and administrative expense declined to $0.5 million for the quarter and $1.1 million for six months, primarily because the 2010 periods included compensation expense associated with the former chief executive officer’s resignation.
- Net cash used in operating activities was $2.6 million for the six months ended June 30, 2011, compared with $1.9 million in 2010. No cash was used for investing activities in 2011.
- Cash and cash equivalents were $21.3 million at June 30, 2011, compared with $2.1 million at December 31, 2010.
- Total liabilities were $3.2 million, including $25,000 of net carrying value for convertible notes. The notes had $1.5 million of principal outstanding, substantially offset by a $1.475 million debt discount, and $50,000 of accrued interest.
- The company had no income-tax provision because it incurred net operating losses.
Material Changes Versus the Prior Comparable Period
- Contract revenue decreased 53% for the quarter and 16% for the six-month period, mainly because activity under the Merial collaboration declined. Merial gave notice of termination in May 2011, and management did not expect contract revenue in the second half of 2011.
- Operating loss improved substantially because research and development and general and administrative expenses were lower than in 2010.
- The 2010 six-month results included a $2.5 million gain from a final milestone payment related to the sale of royalty rights; there was no comparable gain in 2011.
- Loss from discontinued operations was $129,000 for the quarter and $232,000 for six months in 2011, compared with income of $112,000 for the quarter and a loss of $12,000 for six months in 2010. The amounts primarily reflect changes in estimates for a gross-profit guarantee related to a business sold in 2000.
- In April 2011, the company entered into a secured convertible-note facility and received approximately $1.4 million net at the initial closing. The notes initially carried 20% interest; the rate was reduced to 6% effective July 1, 2011.
- In June 2011, the company agreed to a $24.0 million private placement of 160.0 million common shares and warrants to purchase 80.0 million shares. The transaction closed July 1, 2011. Approximately $20.3 million was received before June 30, with the remaining $3.7 million received in July. Net proceeds were approximately $22.8 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected to resubmit the APF530 NDA during the first half of 2012 and expected 2011 research and development expense to increase because of work required for the resubmission.
- Management believed the financing transactions would fund planned operations into 2013 and stated that the financings alleviated going-concern considerations at June 30, 2011.
- The company did not have sufficient resources to launch APF530 independently. Commercialization would require a partner or additional financing if the product were approved.
- APF530 approval was uncertain, and the FDA could require additional work, time and expense before accepting or approving a resubmitted NDA.
- The convertible notes were convertible at an effective price of $0.04 per share and could result in significant dilution. The note facility permitted up to an additional $3.0 million of principal.
- The private placement materially increased potential share dilution through the issued shares and warrants. Registration statement delays could trigger liquidated damages of 1.0% per month of a holder’s pro rata purchase price.
- The company’s common stock was delisted from Nasdaq in April 2011 for failure to meet the $1.00 minimum bid-price requirement and began trading on the OTCQB. Penny-stock restrictions could reduce trading liquidity and impair future capital raising.
- A $0.9 million liability was recorded for the gross-profit guarantee associated with the discontinued cosmeceutical and toiletry business. The ultimate future obligation was not clearly estimable.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm that the filing relates to A.P. Pharma rather than Heron Therapeutics.
- Verify the status and timing of the APF530 NDA resubmission and any subsequent FDA actions.
- Reconcile the July 1, 2011 private placement proceeds, share issuance, warrant terms and resulting dilution.
- Review the secured convertible notes, including the 6% interest rate, conversion provisions, collateral, covenants and potential additional issuance.
- Assess cash burn and whether the stated funding runway into 2013 remains adequate for regulatory and development requirements.
- Monitor the Merial termination and the resulting loss of expected contract revenue.
- Evaluate the potential liability under the discontinued-business gross-profit guarantee and the terms of the extended office lease.