Attached files
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EX-32.1 - EXHIBIT 32.1 - CEO CERTIFICATION - SCOLR Pharma, Inc. | exhibit_32-1.htm |
EX-31.2 - EXHIBIT 31.2 - CFO CERTIFICATION - SCOLR Pharma, Inc. | exhibit_31-2.htm |
EX-31.1 - EXHIBIT 31.1 - CEO CERTIFICATION - SCOLR Pharma, Inc. | exhibit_31-1.htm |
EX-10.4 - EXHIBIT 10.4 - SCOLR Pharma, Inc. | exhibit_10-4.htm |
EX-32.2 - EXHIBIT 32.2 - CFO CERTIFICATION - SCOLR Pharma, Inc. | exhibit_32-2.htm |
EX-10.6 - EXHIBIT 10.6 - SCOLR Pharma, Inc. | exhibit_10-6.htm |
EX-10.3 - EXHIBIT 10.3 - SCOLR Pharma, Inc. | exhibit_10-3.htm |
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 September 30, 2009
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: 001-31982
____________________
SCOLR
Pharma, Inc.
(Exact
name of registrant as specified in its charter)
____________________
Delaware
|
91-1689591
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
19204
North Creek Parkway, Suite 100, Bothell, Washington 98011
(Address
of principal executive offices)
425-368-1050
(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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting company
(as defined in Rule 12b-2 of the Exchange Act).
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o (Do not check if
a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Title
|
Shares
outstanding as of November 2, 2009
|
Common
Stock, par value $0.001
|
41,098,270
|
SCOLR
Pharma, Inc.
FORM
10-Q
For
the Quarterly Period Ended September 30, 2009
3
|
|
3
|
|
3
|
|
4
|
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5
|
|
6
|
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11
|
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17
|
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17
|
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17
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17
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18
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20
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21
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Financial
Statements
|
SCOLR
Pharma, Inc.
(Unaudited)
September
30,
2009
|
December 31,
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
1,946,908
|
$
|
6,363,243
|
||||
Accounts
receivable
|
240,363
|
177,253
|
||||||
Interest
and other receivables
|
6,282
|
1,157
|
||||||
Prepaid
expenses and other assets
|
285,807
|
286,539
|
||||||
Total
current assets
|
2,479,360
|
6,828,192
|
||||||
Property
and Equipment — net of accumulated depreciation of $1,245,400 and
$1,289,844, respectively
|
555,364
|
790,947
|
||||||
Intangible
assets — net of accumulated amortization of $493,671 and $465,724,
respectively
|
564,359
|
557,639
|
||||||
Restricted
cash
|
473,711
|
473,711
|
||||||
$
|
4,072,794
|
$
|
8,650,489
|
|||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$
|
26,102
|
$
|
238,701
|
||||
Accrued
liabilities
|
633,277
|
668,694
|
||||||
Current
portion of term loan
|
—
|
87,850
|
||||||
Total
current liabilities
|
659,379
|
995,245
|
||||||
Deferred
rent
|
271,790
|
310,010
|
||||||
Long-term
portion of term loan
|
—
|
23,269
|
||||||
Total
liabilities
|
931,169
|
1,328,524
|
||||||
Commitments
and Contingencies
|
||||||||
Stockholders’
Equity
|
||||||||
Preferred
stock, authorized 5,000,000 shares, $.01 par value, none issued or
outstanding
|
—
|
—
|
||||||
Common
stock, authorized 100,000,000 shares, $.001 par value 41,098,270 and
41,130,270 issued and outstanding as of September 30, 2009, and
December 31, 2008, respectively
|
41,098
|
41,130
|
||||||
Additional
paid-in capital
|
72,138,140
|
71,255,901
|
||||||
Accumulated
deficit
|
(69,037,613
|
)
|
(63,975,066
|
)
|
||||
Total
stockholders’ equity
|
3,141,625
|
7,321,965
|
||||||
$
|
4,072,794
|
$
|
8,650,489
|
The
accompanying notes are an integral part of these financial
statements.
SCOLR
Pharma, Inc.
(Unaudited)
Three
months ended
September
30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues
|
||||||||||||||||
Royalty
income
|
$
|
261,651
|
$
|
236,308
|
$
|
664,212
|
$
|
781,435
|
||||||||
Total
revenues
|
261,651
|
236,308
|
664,212
|
781,435
|
||||||||||||
Operating
expenses
|
||||||||||||||||
Marketing
and selling
|
54,351
|
116,840
|
200,402
|
545,579
|
||||||||||||
Research
and development
|
572,189
|
2,307,103
|
2,187,626
|
4,387,636
|
||||||||||||
General
and administrative
|
1,220,745
|
947,684
|
3,347,279
|
3,242,614
|
||||||||||||
1,847,285
|
3,371,627
|
5,735,307
|
8,175,829
|
|||||||||||||
Facility
lease termination
|
||||||||||||||||
Gain
from lease buyout
|
—
|
(4,100,000
|
)
|
—
|
(4,100,000
|
)
|
||||||||||
Expenses
related to relocation and lease buyout
|
—
|
116,867
|
—
|
116,867
|
||||||||||||
Total
facility lease buyout
|
—
|
(3,983,133
|
)
|
—
|
(3,983,133
|
)
|
||||||||||
Total
operating (revenue) expenses
|
1,847,285
|
(611,506
|
)
|
5,735,307
|
4,192,696
|
|||||||||||
Income
(loss) from operations
|
(1,585,634)
|
) |
847,814
|
(5,071,095)
|
(3,411,261
|
)
|
||||||||||
Other
income (expense)
|
||||||||||||||||
Interest
income
|
948
|
45,858
|
12,060
|
205,530
|
||||||||||||
Interest
expense
|
—
|
(3,393
|
)
|
(3,512
|
)
|
(11,565
|
)
|
|||||||||
Other
|
—
|
91
|
—
|
1,329
|
||||||||||||
Total
other income
|
948
|
42,556
|
8,548
|
195,294
|
||||||||||||
Net
(loss) income
|
$
|
(1,584,686
|
)
|
$
|
890,370
|
$
|
(5,062,547
|
)
|
$
|
(3,215,967
|
)
|
|||||
Net
(loss) income per share, basic and diluted
|
$
|
(0.04
|
)
|
$
|
.02
|
$
|
(0.12
|
)
|
$
|
(0.08
|
)
|
|||||
Shares
used in computing basic net (loss) income per share
|
41,098,270
|
41,130,270
|
41,098,270
|
41,110,684
|
||||||||||||
Shares
used in computing diluted net (loss) income per share
|
41,098,270
|
41,561,623
|
41,098,270
|
41,110,684
|
The
accompanying notes are an integral part of these financial
statements.
(Unaudited)
Nine
months ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$
|
(5,062,547
|
)
|
$
|
(3,215,967
|
)
|
||
Reconciliation
of net loss to net cash used in operating activities
|
||||||||
Depreciation
and amortization
|
330,529
|
312,064
|
||||||
Write-off
of intangible assets
|
86,681
|
38,424
|
||||||
(Gain)
on sale of equipment
|
(14,016
|
)
|
—
|
|||||
Share-based
compensation for employee services
|
962,596
|
894,327
|
||||||
Increase
(decrease) in cash resulting from changes in assets and
liabilities
|
||||||||
Accounts
and other receivables
|
(68,235
|
)
|
(18,298
|
)
|
||||
Prepaid
expenses and other current assets
|
732
|
99,806
|
||||||
Accounts
payable and accrued expenses
|
(451,860
|
)
|
(281,049
|
)
|
||||
Net
(cash used) in operating activities
|
(4,216,120
|
)
|
(2,170,693
|
)
|
||||
Cash
flows from investing activities:
|
||||||||
Purchase
of equipment and furniture
|
(95,419
|
)
|
(2,615
|
)
|
||||
Proceeds
from insurance settlement
|
85,267
|
—
|
||||||
Proceeds
from sale of fixed assets
|
80,000
|
—
|
||||||
Patent
and technology rights payments
|
(158,912
|
)
|
(159,832
|
)
|
||||
Restricted
cash
|
—
|
(564,000
|
)
|
|||||
Net
(cash used) by investing activities
|
(89,064
|
)
|
(726,447
|
)
|
||||
Cash
flows from financing activities:
|
||||||||
Payments
on term loan
|
(111,119
|
)
|
(59,331
|
)
|
||||
Proceeds
from exercise of common stock options and warrants
|
(32
|
)
|
40,086
|
|||||
Net
(cash used) by financing activities
|
(111,151
|
)
|
(19,245
|
)
|
||||
Net
(decrease) in cash
|
(4,416,335
|
)
|
(2,916,385
|
)
|
||||
Cash
at beginning of period
|
6,363,243
|
11,825,371
|
||||||
Cash
at end of period
|
$
|
1,946,908
|
$
|
8,908,986
|
||||
Cash
paid during the period for interest
|
$
|
2,165
|
$
|
10,502
|
The
accompanying notes are an integral part of these financial
statements.
SCOLR
Pharma, Inc.
Note
1 — Financial Statements
The
unaudited financial statements of SCOLR Pharma, Inc. (the “Company”) have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting and pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, the financial information includes all normal and recurring
adjustments that the Company considers necessary for a fair presentation of the
financial position at such dates and the results of operations and cash flows
for the periods then ended. The balance sheet at December 31, 2008 has been
derived from the audited financial statements at that date. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to SEC rules and regulations on
quarterly reporting. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 2009. The accompanying unaudited financial statements
and related notes should be read in conjunction with the audited financial
statements and the Form 10-K for the Company’s fiscal year ended
December 31, 2008.
Use
of Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Estimates are used for, but not limited to those
used in revenue recognition, the determination of the allowance for doubtful
accounts, depreciable lives of assets, estimates and assumptions used in the
determination of fair value of stock options and warrants, including share-based
compensation expense, and deferred tax valuation allowances. Future events and
their effects cannot be determined with certainty. Accordingly, the accounting
estimates require the exercise of judgment. The accounting estimates used in the
preparation of the financial statements may change as new events occur, as more
experience is acquired, as additional information is obtained and as the
Company’s operating environment changes. Actual results could differ from those
estimates.
Note
2 — New Accounting Pronouncements
In May
2009, the FASB issued Accounting Standards Codification (ASC) 855, previously
known as SFAS No. 165, “Subsequent Events.” ASC 855 defines subsequent events as
transactions that occur after the balance sheet date but before financial
statements are issued or are available to be issued. ASC 855 defines two types
of subsequent events: (i) events or transactions that provide additional
evidence about conditions that existed at the date of the balance sheet,
including the estimates inherent in the process of preparing financial
statements (that is, recognized subsequent events); and (ii) events that provide
evidence about conditions that did not exist at the date of the balance sheet
but arose after that date (that is, nonrecognized subsequent events). In
addition, ASC 855 requires an entity to disclose the date through which
subsequent events have been evaluated, as well as whether that date is the date
the financial statements were issued or the date the financial statements were
available to be issued. ASC 855 is effective for periods ending after June 15,
2009. The adoption of ASC 855, effective June 30, 2009 did not have any effect
on our financial position, results of operations or cash flows.
In June
2009, the FASB issued Accounting Standards Codification (ASC) 105, previously
known as SFAS No. 168, “FASB Accounting Standards CodificationTM and the Hierarchy of
Generally Accepted Accounting Principles—a replacement of FASB Statement No.
162.” ASC 105 will become the source of authoritative U.S. generally accepted
accounting principles (“GAAP”) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. This Statement is effective
for financial statements issued for interim and annual periods ending after
September 15, 2009. On the effective date, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification will become non-authoritative. As we believe that our accounting
practices are consistent with the Codification, we do not believe that the
adoption of ASC 105 had a material effect on our financial position, results of
operations or cash flows.
In June
2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.” This position states that unvested share-based payment awards that
contain nonforfeitable rights to dividends (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share (EPS) under the two-class method described in paragraphs 60 and 61 of
FASB Statement No. 128, “Earnings per Share.” FSP EITF 03-6-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
The adoption of EITF 03-6-1 in the current year did not have an effect on the
Company’s calculation of EPS for the three and nine months ended September 30,
2009 and 2008.
ASU
2009-04, Accounting for Redeemable Equity Instruments—Amendment to Section
480-10-S99, updates the SEC staff’s guidance on the classification and
measurement of redeemable securities that was originally issued as EITF Topic
D-98, “Classification and Measurement of Redeemable Securities.” In addition to
updating the guidance for Codification references, the revision reorganizes
Topic D-98’s guidance. Instruments with nontraditional redemption features
discussed throughout Topic D-98 are now grouped in an expanded scope section
that explains whether or not each instrument is subject to the temporary equity
classification of SEC Accounting Series Release 268, Presentation in Financial
Statements of “Redeemable Preferred Stocks,” and related SEC staff guidance. The
revised guidance also groups securities with specific contractual provisions
that would require classification in temporary equity, and similarly organizes
securities with contractual provisions for which permanent equity classification
is appropriate. In addition, disclosure guidance throughout Topic D-98 is
combined in a new section on disclosures. The issuance of ASU 2009-04 did not
have a significant effect on the Company’s financial statements.
The FASB
issued Statement 167, Amendments to FASB Interpretation No. 46(R) (not yet
included in the Codification), to improve how enterprises account for and
disclose their involvement with variable interest entities (VIEs), which are
special-purpose entities and other entities whose equity at risk is insufficient
or lacks certain characteristics. The issuance of Statement 167 did not have a
significant effect on the Company’s financial statements.
Note
3 – Accounts Receivable
At
September 30, 2009, accounts receivable consisted of royalty receivables from
Controlled Delivery Technology (CDT)-based product sales.
Note
4 — Facility Lease Termination
In May
2008, the Company entered into a Lease Termination and Surrender Agreement,
under which the Company agreed to terminate the lease for its corporate facility
for consideration of $4.1 million. Under the terms of the agreement, the Company
received $1.0 million upon execution of the agreement and the remaining $3.1
million in September 2008, at the time the Company vacated the premises. The
$4.1 million cash settlement and $116,867 in costs that were incurred related to
the lease and relocation to the new space were recognized in operating expense
in September 2008.
Note
5 — Liquidity
The
Company incurred a net loss of approximately $5.1 million for the nine months
ended September 30, 2009, and used cash from operations of approximately $4.2
million. Cash flows of $89,064 used by investing activities during the nine
months ended September 30, 2009, represents $95,419 for equipment purchases plus
$158,912 in patent and trademark related expenditures. These amounts were offset
by $85,267 in proceeds from an insurance settlement and $80,000 from the sale of
research and development equipment. Cash flows used by financing activities for
the period ended September 30, 2009, reflects payments on term loan of $111,119
through April 2009, at which time the loan was paid off.
The
Company had approximately $1.9 million in cash and cash equivalents, and
$473,711 in restricted cash, related to our facility lease, as of September 30,
2009. The Company is investing its cash and cash equivalents in
government-backed securities. These securities are considered level 1 securities
in accordance with FASB 157 “Fair Value Measurements” as the securities have
quoted prices in active markets. Based on our current operating plan, the
Company anticipates that its existing cash and cash equivalents, together with
expected royalties from third parties, will be able to fund its operations
through February 2010, assuming the Company does not trigger additional
obligations, and unless unforeseen events arise that negatively impact its
liquidity.
Our
current operating strategy is to actively manage our liquidity by limiting
clinical and development expenses to our ibuprofen and pseudoephedrine lead
products, and reducing our marketing and general administrative and other
operating expenses. We have deferred all significant expenditures on our
development projects, including the actual use study required by the FDA as a
prerequisite to submission of our regulatory application for ibuprofen, pending
additional financing or partnership support. Without increased revenues or
additional funding we do not expect to be able to complete development of our
current projects. In addition, the Company has reduced its marketing and general
and administrative expenses and continues to evaluate opportunities to reduce
operating expenses. As described below in footnote 12 – Subsequent
Events, the Company renegotiated the lease of its corporate facility to reduce
the rent and leased space. In addition, in accordance with the amended lease
agreement, the Company reduced its monthly cash lease payment by $18,000 for a
period of one year commencing November 1, 2009. During this one year period,
$18,000 of the Company's monthly rent will be paid through draw downs
on the letter of credit collateralized by $473,711 of restricted cash. The
letter of credit secures the Company’s lease obligation. In August 2009, the
Company paid the rent due for July, August and September 2009. In
addition to renegotiating the lease, in August 2009 the Company eliminated one
executive position and in October 2009 reduced the annual cash compensation
for two executive officers effective November 2009.
The
Company expects its operating losses and negative cash flow to continue as it
advances preclinical research and related work to support applications for
regulatory approvals and commercialization of its product candidates. We need to
generate additional revenues or raise additional capital to fund operations,
continue research and development projects, and commercialize our products. The
Company may not be able to secure additional financing on favorable terms, or at
all. If the Company is unable to obtain necessary additional financing, its
business will be adversely affected and it may be required to reduce the scope
of its development activities or discontinue operations.
The
Company’s capital resources are very limited and operations to date have been
funded primarily with the proceeds from public equity financings, royalty
payments, and collaborative research agreements. The Company is pursuing
additional sources of financing that could involve strategic transactions,
including mergers and business combinations, new partnerships as well as
opportunities to expand product sales and other options. However, there are
significant uncertainties as to the Company’s ability to access potential
sources of capital. The Company may not be able to enter any strategic
transaction or collaboration on acceptable terms, or at all, due to conditions
in the pharmaceutical industry or in the economy in general. Competition for
such arrangements is intense, with many specialty pharmaceutical companies
attempting to secure alliances with more established pharmaceutical or consumer
products companies. Although the Company has been engaged in discussions with
potential partners, there is no assurance that any agreements will result from
these discussions in a timely manner, or at all, or that revenues generated by
such agreements will offset operating expenses sufficiently to reduce its short
term funding requirements.
In
addition to efforts to enter into collaboration and licensing agreements, the
Company plans to continue to seek access to the capital markets to fund its
operations. The Company filed a shelf registration statement in the amount of
$40 million which was declared effective by the Securities and Exchange
Commission on November 25, 2008 under which it may offer from time-to-time, one
or more offerings of securities up to an aggregate public offering price of $40
million. However, there can be no assurance that financing will be available on
favorable terms or at all. Additionally, as described below, the Company has
received notice from the NYSE Amex LLC (“Exchange”) that it is not in compliance
with continued listing requirements. While the Company has provided the Exchange
with a plan to regain compliance with applicable listing standards, its
inability to maintain listing of its common stock on the Exchange may further
limit its ability to access the capital markets. Delisting from NYSE Amex could
also have other negative results, including the potential loss of confidence by
suppliers and employees, the loss of institutional investors interest and fewer
business development opportunities. Any issuance of additional securities would
be extremely dilutive to the Company’s existing stockholders.
The
Company’s failure to raise capital, including financial support from
partnerships or other collaborations, in 2009 would materially adversely affect
its business, financial condition and results of operations, and could force it
to reduce or cease operations. If the Company is forced to reduce or cease
operations it may trigger additional obligations, including contractual
severance obligations aggregating as much as $975,000. In addition, the Company
may be forced to liquidate assets at reduced levels due to its immediate
liquidity requirements. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. Consequently, the
audit report prepared by the Company’s independent registered public accounting
firm relating to its financial statements for the year ended December 31, 2008
included a going concern explanatory paragraph.
On June
25, 2009 the Company received notice from the Exchange that it was not in
compliance with Section 1003(a) (iii) of the NYSE Amex Company Guide with
stockholders' equity of less than $6,000,000 and losses from continuing
operations and net losses in its five most recent fiscal years. As allowed
by Exchange rules, the Company submitted a plan of compliance on July 29, 2009,
advising the Exchange of action it has taken and will take, to regain compliance
with Section 1003(a) (iii) of the Company Guide by December 27, 2010. In
September 2009, the Exchange approved the Company’s plan to regain compliance
with the continued listing standard set forth in Section 1003(a) (iii) of the
NYSE Amex Company Guide within the specified timeframes indicated by the
Exchange. However NYSE Amex LLC simultaneously issued a notice that the Company
does not meet the continued listing standard set forth in Section 1003(a)(iv) of
the NYSE Amex Company Guide because, based on the Exchange’s a review of the
Company’s Form 10-Q for the period ending June 30, 2009, the Company has
sustained losses which are so substantial in relation to its overall operations
or its existing financial resources, or its financial condition has become so
impaired that it appears questionable, in the opinion of the Exchange, as to
whether the Company will be able to continue operations and/or meet its
obligations as they mature.
On
October 15, 2009 the Company submitted additional information to the Exchange to
address how it plans to regain compliance with section 1003(a) (iv) of the
Company Guide by March 15, 2010. If the Exchange does not accept the plan, or
even if accepted, if the Company is not in compliance with the continued listing
standards at the end of the plan period, or the Company
does not make progress consistent with the plan during such period, then the
Exchange may initiate delisting proceedings.
Note 6 — Income Taxes
The
Company continues to maintain a valuation allowance for the full amount of the
net deferred tax asset balance associated with its net operating losses as
sufficient uncertainty exists regarding its ability to realize such tax assets
in the future. The Company expects the amount of the net deferred tax asset
balance and full valuation allowance to increase in future periods as it incurs
future net operating losses. There were no unrecognized tax benefits as of
December 31, 2008, or September 30, 2009. The Company does not anticipate any
significant changes to its unrecognized tax benefits within the next twelve
months.
Note
7 — Share-Based Compensation
During
the three-month period ended September 30, 2009, the Company granted 400,000
options to purchase shares of its common stock with a fair value of
$163,542. No restricted stock was issued during the three-month
period ended September 30, 2009, and no stock options or restricted stock was
issued during the three month period ended September 30, 2008. During the nine
month periods ended September 30, 2009 and 2008, the Company granted stock
options and shares of restricted stock for 992,500 and 996,500 shares of common
stock, respectively, with a fair value of $407,077 and $757,416.
The
following tables set forth the aggregate share-based compensation expense
resulting from equity incentive awards issued to the Company’s employees and to
non-employees for services rendered that is recorded in the Company’s results of
operations for the period ended:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
Functions
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Marketing
and selling
|
$
|
36,426
|
$
|
10,139
|
$
|
49,097
|
$
|
53,219
|
||||||||
Research
and development
|
210,751
|
95,731
|
357,172
|
267,451
|
||||||||||||
General
and administrative
|
139,791
|
172,580
|
556,327
|
573,657
|
||||||||||||
Total
|
$
|
386,968
|
$
|
278,450
|
$
|
962,596
|
$
|
894,327
|
Note
8 — Net Loss Per Share Applicable to Common Stockholders
Basic net
income (loss) per common share is calculated based on the weighted-average
number of shares of the Company’s common stock outstanding during the period.
Diluted net income (loss) per common share is calculated based on the
weighted-average number of shares of our common stock outstanding and other
dilutive securities outstanding during the period. The potential dilutive shares
of the Company’s common stock resulting from the assumed exercise of outstanding
stock options, and the assumed exercise of the warrants are determined under the
treasury stock method. Diluted net income (loss) per share includes the effect
of potential issuances of common stock, except when the effect is anti-dilutive.
Shares used in the computation of net income (loss) per common share are as
follows:
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Weighted-average
number shares – basic
|
41,098,270
|
41,130,270
|
41,098,270
|
41,110,684
|
||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||
Stock
options
|
—
|
83,431
|
—
|
—
|
||||||||||||
Warrants
|
—
|
347,922
|
—
|
—
|
||||||||||||
Weighted-average
shares - diluted
|
41,098,270
|
41,561,623
|
41,098,270
|
41,110,684
|
For the
three month period ending September 30, 2009, and the nine month periods ending
September 30, 2009, and 2008, the weighted average number of diluted shares does
not include potential issuances of common shares which are anti-dilutive. The
following potential common shares were not included in the calculation of
diluted net loss per share for these periods in 2009 and 2008 as the effect
would have been anti-dilutive.
2009
|
2008
|
|||||||
Assumed
exercise of stock options
|
5,148,193
|
4,352,512
|
||||||
Assumed
conversion of warrants
|
2,226,550
|
3,171,399
|
||||||
Total
|
7,374,743
|
7,523,911
|
Note
9 — Future Commitments
The
Company has certain material agreements with its manufacturing and testing
vendors related to its ongoing clinical trial work associated with its drug
delivery technology. Contract amounts are paid based on materials used and on a
work performed basis. Generally, the Company has the right to terminate these
agreements upon 30 days notice and would be responsible for services and
materials and related costs incurred prior to termination.
Note
10 — Warrants
During
the three months ended September 30, 2009, there were no new warrants issued or
exercised. The Company had the following warrants to purchase common stock
outstanding at September 30, 2009:
Issue
Date
|
Issued
Warrants
|
Exercise
Price
|
Term
|
Outstanding
Warrants
|
Expiration
Date
|
|||||||||
September 30, 2002
|
750,000
|
$
|
0.50
|
10 years
|
750,000
|
September 30, 2012
|
||||||||
February 8, 2005
|
75,000
|
5.00
|
5
years
|
75,000
|
February
7, 2010
|
|||||||||
April
21, 2006
|
11,000
|
7.50
|
5
years
|
11,000
|
April
20, 2011
|
|||||||||
December
4, 2007
|
1,390,550
|
2.10
|
5
years
|
1,390,550
|
December
3, 2012
|
|||||||||
Grand
Total
|
2,226,550
|
2,226,550
|
Each
warrant entitles the holder to purchase one share of common stock at the
exercise price.
Note
11 – Related Party Transactions
On August
28, 2009, Dr. Bruce S. Morra resigned as President and Chief Executive Officer
of the Company. In connection with Dr. Morra’s resignation the Company entered
into a Separation and Release Agreement with Dr. Morra which provided for an
immediate lump-sum cash payment of $230,093, and six monthly cash payments of
$35,529 commencing January 1, 2010. The six monthly cash payments were accrued
at September 30, 2009 and are included in the results of
operations. In addition, the Agreement provided for the acceleration
of vesting of 125,000 outstanding stock options granted to Dr. Morra on January
30, 2009, the issuance of 214,285 shares of common stock to Dr. Morra on January
4, 2010, and payment of medical benefits for one year. The Separation
and Release Agreement includes a waiver and release of certain claims by the
parties. Dr. Morra continues to serve as a director of the
Company.
The
Company appointed Stephen J. Turner as Chief Executive Officer and President as
of August 31, 2009. Mr. Turner has been the Company’s Chief Technical Officer
since November 2003, and joined the Company in October 1999.
Note
12 – Subsequent Events
We have
considered all events that have occurred subsequent to September 30, 2009 and
through November 6, 2009, the date the financial statements as of and for the
period ended September 30, 2009 were available to be issued.
On
November 2, 2009, the Company entered into an agreement with its Chief Executive
and Chief Financial Officers to accept a reduction in cash compensation to a
rate of $175,000 per year effective November 1, 2009. In connection with this
agreement, the Board of Directors granted each such officer fully vested options
to purchase 500,000 shares of the Company’s common stock at $.48 per share. The
options are exercisable for up to two years after termination of employment, for
any reason. In addition, the Company granted its Senior Vice President
Business and Legal Affairs options to purchase 200,000 shares of the Company’s
common stock at $.48 per share. One-third of such options shall vest on October
29, 2010 with monthly vesting thereafter for 24 months until all options are
fully vested. Such options are exercisable for one year after termination of
employment.
On
November 5, 2009, the Company entered into an agreement with Arden
Realty Limited Partnership amending its lease dated June 20, 2008 of office and
laboratory space at 19204 North Creek Parkway, Bothell,
Washington. Under the terms of the amended lease, the
Company reduced the amount of leased space to 15,615 square feet from
20,468 square feet and reduced the rental payments to the amounts set forth
below. In addition, effective November 1, 2009, the
Company will be allowed to pay up to $18,000 of its monthly rent for
twelve months through draw downs on the letter of credit which secures the
lease. The remaining letter of credit (estimated to be $256,820 after
such reductions) shall remain in place through the lease termination date of
January 31, 2016.
The
remaining monthly rent is as follows:
Period
|
Monthly Basic Rental - Total
Premises
|
|||
November
1, 2009 – August 31, 2010
|
$25,684.60 | |||
September
1, 2010 – October 31, 2010
|
$26,444.60 | |||
November
1, 2010 – August 31, 2011
|
$26,444.60 | |||
September
1, 2011 – August 31, 2012
|
$27,249.67 | |||
September
1, 2012 – August 31, 2013
|
$28,009.67 | |||
September
1, 2013 – August 31, 2014
|
$28,904.13 | |||
September
1, 2014 – August 31, 2015
|
$29,775.21 | |||
September
1, 2015 – January 31, 2016
|
$30,669.67 |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The
following discussion and analysis should be read in conjunction with the
financial statements, including the notes thereto, appearing in Item 1 of
Part I of this quarterly report and in our 2008 annual report on Form
10-K.
This
report includes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. When used in this report, the words
“anticipate,” “believe,” “estimate,” “may,” “intend,” “expect,” and similar
expressions identify certain of such forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
plans, intentions or expectations will be achieved. Actual result, performance
or achievements could differ materially from historical results or those
contemplated, expressed or implied by the forward-looking statements contained
in this report. Important factors that could cause actual results to differ
materially from our forward-looking statements are set forth in our Annual
Report on form 10-K for the year ended December 31, 2008, as updated by Item 1A
of Part II of this Quarterly Report on Form 10-Q, and as otherwise detailed in our
periodic reports filed with the SEC. We undertake no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Important
factors that could cause actual results to differ materially from our
forward-looking statements are set forth in this report in Item 1A of Part
II, and are detailed from time to time in our periodic reports filed with the
SEC. We undertake no obligation to update any forward-looking statements,
whether as a result of new information, future events or otherwise.
Overview
We are a
specialty pharmaceutical company. Our corporate objective is to combine our
formulation experience and knowledge with our proprietary and patented
Controlled Delivery Technology (CDT®) platforms to develop novel pharmaceutical,
OTC, and nutritional products. Our CDT platforms are based on multiple issued
and pending patents and other intellectual property for the programmed release
or enhanced performance of active pharmaceutical ingredients and nutritional
products.
We have
developed multiple private label controlled release nutritional products
incorporating our CDT platforms that are sold by national retailers. In October
2005, we entered into a strategic alliance with a subsidiary of Perrigo Company
for the manufacture, marketing, distribution, sale and use of certain dietary
supplement products in the United States. We receive royalty payments
based on a percentage of Perrigo’s net profits derived from the sales of
products covered by our agreement. We have developed additional nutritional
products and are seeking to expand sales of nutritional products through
additional channels in the United States, as well as in Canada, Europe and other
markets.
Our lead
product candidate is a CDT-based controlled release formulation of ibuprofen, an
analgesic typically used for the treatment of pain, fever and inflammation. In
November 2008, we successfully completed our pivotal phase III trial to evaluate
the safety and efficacy of our 12 hour CDT 600 mg controlled release ibuprofen
for the OTC market. There are currently no controlled release formulations of
ibuprofen approved for use in North America. In addition, our first Abbreviated
New Drug Application, or ANDA, for our 12 hour pseudoephedrine product was
accepted by the FDA in September 2008. In January 2009, we received a complete
response letter from the FDA which requested additional information in the area
of chemical manufacturing and controls, all of which was identified by the FDA
as “minor.” In August 2009, we amended our submission and provided the requested
information to the FDA. We believe our formulation will offer attractive tablet
size and cost saving opportunities when compared to similar tablets already on
the market.
We expect
our operating losses and negative cash flow to continue as we advance
preclinical research and related work to support applications for regulatory
approvals and commercialization of our product candidates. We need to raise
additional capital to fund operations, continue research and development
projects, and commercialize our products. We may not be able to secure
additional financing on favorable terms, or at all. If we are unable to obtain
necessary additional financing, our business will be adversely affected and we
may be required to reduce the scope of our development activities, discontinue
operations, or seek bankruptcy protection.
Critical
Accounting Policies and Estimates
Since
December 31, 2008, none of our critical accounting policies, or our
application thereof, as more fully described in our annual report on Form 10-K
for the year ended December 31, 2008, has significantly changed. However,
as the nature and scope of our business operations mature, certain of our
accounting policies and estimates may become more critical. You should
understand that generally accepted accounting principles require management to
make estimates and assumptions that affect the amounts of assets and liabilities
or contingent assets and liabilities at the date of our financial statements, as
well as the amounts of revenues and expenses during the periods covered by our
financial statements. The actual amounts of these items could differ materially
from these estimates.
New
Accounting Pronouncements
In May
2009, the FASB issued Accounting Standards Codification (ASC) 855, previously
known as SFAS No. 165, “Subsequent Events.” ASC 855 defines subsequent events as
transactions that occur after the balance sheet date but before financial
statements are issued or are available to be issued. ASC 855 defines two types
of subsequent events: (i) events or transactions that provide additional
evidence about conditions that existed at the date of the balance sheet,
including the estimates inherent in the process of preparing financial
statements (that is, recognized subsequent events); and (ii) events that provide
evidence about conditions that did not exist at the date of the balance sheet
but arose after that date (that is, nonrecognized subsequent events). In
addition, ASC 855 requires an entity to disclose the date through which
subsequent events have been evaluated, as well as whether that date is the date
the financial statements were issued or the date the financial statements were
available to be issued. ASC 855 is effective for periods ending after June 15,
2009. The adoption of ASC 855, effective June 30, 2009 did not have any effect
on our financial position, results of operations or cash flows.
In June
2009, the FASB issued Accounting Standards Codification (ASC) 105, previously
known as SFAS No. 168, “FASB Accounting Standards CodificationTM and the Hierarchy of
Generally Accepted Accounting Principles—a replacement of FASB Statement No.
162.” ASC 105 will become the source of authoritative U.S. generally accepted
accounting principles (“GAAP”) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. This Statement is effective
for financial statements issued for interim and annual periods ending after
September 15, 2009. On the effective date, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification will become non-authoritative. As we believe that our accounting
practices are consistent with the Codification, we do not believe that the
adoption of ASC 105 had a material effect on our financial position, results of
operations or cash flows.
In June
2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.” This position states that unvested share-based payment awards that
contain nonforfeitable rights to dividends (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share (EPS) under the two-class method described in paragraphs 60 and 61 of
FASB Statement No. 128, “Earnings per Share.” FSP EITF 03-6-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
The adoption of EITF 03-6-1 in the current year did not have an effect on the
Company’s calculation of EPS for the three and nine months ended September 30,
2009 and 2008.
ASU
2009-04, Accounting for Redeemable Equity Instruments—Amendment to Section
480-10-S99, updates the SEC staff’s guidance on the classification and
measurement of redeemable securities that was originally issued as EITF Topic
D-98, “Classification and Measurement of Redeemable Securities.” In addition to
updating the guidance for Codification references, the revision reorganizes
Topic D-98’s guidance. Instruments with nontraditional redemption features
discussed throughout Topic D-98 are now grouped in an expanded scope section
that explains whether or not each instrument is subject to the temporary equity
classification of SEC Accounting Series Release 268, Presentation in Financial
Statements of “Redeemable Preferred Stocks,” and related SEC staff guidance. The
revised guidance also groups securities with specific contractual provisions
that would require classification in temporary equity, and similarly organizes
securities with contractual provisions for which permanent equity classification
is appropriate. In addition, disclosure guidance throughout Topic D-98 is
combined in a new section on disclosures. The issuance of ASU 2009-04 did not
have a significant effect on the Company’s financial statements.
The FASB
issued Statement 167, Amendments to FASB Interpretation No. 46(R) (not yet
included in the Codification), to improve how enterprises account for and
disclose their involvement with variable interest entities (VIEs), which are
special-purpose entities and other entities whose equity at risk is insufficient
or lacks certain characteristics. The issuance of Statement 167 did not have a
significant effect on the Company’s financial statements.
Results
of Operations
Comparison
of the Three Months Ended September 30, 2009 and 2008
Revenues
Total
revenues, which consist of royalty revenue from our collaboration agreements,
increased 11%, or $25,343 to $261,651 for the three months ended September 30,
2009, compared to $236,308 for the same period in 2008. This increase is a
result of increased sales of our nutrional products by Perrigo. Royalty payments
are based on Perrigo’s net profits from the sale of CDT-based
products.
Operating
Expenses
Marketing
and Selling Expenses
Marketing
and selling expenses decreased 53%, or $62,489 to $54,351 for the three months
ended September 30, 2009, compared to $116,840 for the same period in 2008. Of
this reduction in expense, $29,961 is due to a reduction in personnel and
$53,714 reflects the impact of lower advertising and tradeshow
expenses.
Research
and Development Expenses
Research
and development expenses decreased 75%, or $1.7 million to $572,189 for the
three months ended September 30, 2009, compared to $2.3 million for the
same period in 2008. Our deferral of development activities on certain projects
pending additional funding resulted in a $1.6 million reduction in
expenses. In addition, personnel related expenses decreased $48,969
due to personnel reductions. These decreases were offset by an increase of
$93,791 in non-cash share based compensation expense related to stock options
granted during the year.
General
and Administrative Expenses
General
and administrative expenses increased 29%, or $273,061 to $1.2 million for the
three months ended September 30, 2009, compared to $947,684 for the same period
in 2008, primarily due to higher personnel related costs, offset by lower
non-cash share based compensation expense, insurance premiums, and director and
shareholder relations expense. Personnel related expenses increased $413,334 due
to the recognition of severance costs associated with the resignation of our
chief executive officer. Non-cash share based compensation expense
decreased $77,673 due to a lower number of stock options granted during the
year. Insurance premiums decreased $29,630 due to lower rates, and director and
shareholder relations expense decreased $28,788 due to a decrease in the number
of directors.
Facility
Lease Termination
In May
2008, we entered an agreement to terminate the lease for our former corporate
facility for consideration of $4.1 million which was recognized as a reduction
to operating expense in September 2008. Under the terms of the
agreement, we received $1.0 million upon execution of the agreement and the
remaining $3.1 million in September 2008, at the time we vacated the premises.
We incurred costs of $116,867 related to relocation to our new facility and the
lease buyout which were recognized in operating expense in September
2008.
Other
Income (Expense), Net
Other
income decreased 98%, or $41,608 to $948 for the three months ended September
30, 2009, compared to $42,556 for the comparable period in 2008. This decrease
was due to a decrease in interest income due to lower cash
balances.
Net
Loss
Net loss
increased $2.5 million to $1.6 million for the three months ended September 30,
2009, compared to $890,370 of net income for the same period in 2008. The
increased net loss reflects the net impact of the non-recurring $4.0 million
income recognized in the prior year for the facility lease buyout.
Comparison
of the Nine Months Ended September 30, 2009, and 2008
Revenues
Total
revenues decreased 15%, or $117,223 to $664,212 for the nine months ended
September 30, 2009, compared to $781,435 for the same period in 2008. This
decrease is primarily due to lower royalty income from our strategic alliance
with Perrigo.
Operating
Expenses
Marketing
and Selling Expenses
Marketing
and selling expenses decreased 63%, or $345,177 to $200,402 for the nine months
ended September 30, 2009, compared to $545,579 for the same period in 2008.
This decrease was primarily due to a decrease of $189,339 in personnel related
expenses through personnel reductions, a decrease of $107,500 in advertising and
tradeshow expense, and lower commission expense of $21,106 associated with lower
revenues.
Research
and Development Expenses
Research
and development expenses decreased 50%, or $2.2 million to $2.2 million for the
nine months ended September 30, 2009, compared to $4.4 million for the same
period in 2008. The decrease is primarily due to a reduction in personnel
related expenses of $342,951 through reductions in personnel and a decrease of
$2.0 million in clinical trial and outside manufacturing, and repairs and
maintenance expenses as a result of our decision to defer development activities
on certain projects pending additional funding. These decreases were offset by
an increase of $89,721 in non-cash share based compensation expense related to
options granted in the current year.
General
and Administrative Expenses
General
and administrative expenses increased 3%, or $104,665, to $3.3 million for the
nine months ended September 30, 2009, compared to $3.2 million for the same
period in 2008, primarily due to an increase of $305,164 in personnel related
expenses. Personnel related expenses increased due to the recognition
of severance costs associated with the resignation of our chief executive
officer. In addition, other outside service expenses increased $94,632 due to
investment banking activities. These increases were offset by lower insurance
premium expense of $84,954, a decrease in director and shareholder relations
expense of $78,274 due to a reduced number of directors, and a decrease of
$55,342 in travel expenses.
Facility
Lease Termination
In May
2008, we entered an agreement to terminate the lease for our former corporate
facility for consideration of $4.1 million, which was recognized as a reduction
to operating expense in September 2008. Under the terms of the agreement, we
received $1.0 million upon execution of the agreement and the remaining $3.1
million in September 2008, at the time we vacated the premises. We incurred
costs of $116,867 related to relocation to our new facility and the lease buyout
which were recognized in operating expense in September 2008.
Other
Income (Expense), Net
Other
income (expense) decreased 96%, or $186,746 to $8,548 for the nine months ended
September 30, 2009, compared to $195,294 of net income for the same period
in 2008. This change was due to a decrease in interest income from lower cash
balances.
Net
Loss
The net
loss for the nine months ended September 30, 2009, increased 57%, or $1.8
million to $5.1 million, compared with a net loss of $3.2 million for the same
period in 2008. This change was primarily due to the net impact of the
non-recurring $4.0 million income recognized in the prior year for the facility
lease buyout.
Liquidity
and Capital Resources
We had
approximately $1.9 million in cash and cash equivalents, and $473,711 in
restricted cash as of September 30, 2009. Based on our current operating plan,
we anticipate that our existing cash and cash equivalents, together with
expected royalties from third parties, will be sufficient to fund our operations
through February 2010, assuming we do not trigger additional obligations, and
unless unforeseen events arise that negatively impact our liquidity. In the
event we are unsuccessful in generating additional revenues or raising
additional funds, it will be necessary to substantially reduce our operations to
preserve capital or seek bankruptcy protection or otherwise wind up our
business.
Our
current operating strategy is to actively manage our liquidity by limiting
clinical and development expenses to our ibuprofen and pseudoephedrine lead
products, and reducing our general administrative and other operating expenses
while also supporting additional marketing and distribution of our nutritional
products. We have deferred all significant expenditures on our development
projects, including the actual use study required by the FDA as a prerequisite
to submission of our regulatory application for ibuprofen, pending additional
financing or partnership support. Without increased revenues or additional
funding we do not expect to be able to complete development of our current
projects. In addition, we have reduced our marketing and general and
administrative expenses and continue to evaluate opportunities to reduce
operating expenses. As described in Item 5 of Part II of this Quarterly Report,
we rengotiated the lease of our corporate facility to reduce our rent and leased
space. In addition, in accordance with the amended lease agreement, we
reduced our monthly cash lease payment by $18,000 for a period of one year
commencing November 1, 2009. During this one year period, the $18,000 of our
monthly rent will be paid through draw downs on the letter of credit
collateralized by $473,711 of our restricted cash. The letter of credit secures
our lease obligation. In August 2009, we paid the rent due for July, August and
September 2009. In addition to renegotiating our lease, in August
2009 we eliminated one executive position and in October 2009 reduced the
annual cash compensation for two executive officers effective November
2009.
Our
capital resources are very limited and operations to date have been funded
primarily with the proceeds from public equity financings, royalty payments, and
collaborative research agreements. We are pursuing additional sources of
financing that could involve strategic transactions, including mergers and
business combinations, new collaborations, as well as opportunities to expand
product sales and other options. However, there are significant uncertainties as
to our ability to increase revenues or access potential sources of capital. We
may not be able to enter any collaboration on terms acceptable to us, or at all,
due to conditions in the pharmaceutical industry or in the economy in general.
Competition for such arrangements is intense, with many biopharmaceutical
companies attempting to secure alliances with more established pharmaceutical or
consumer products companies. Although we have been engaged in discussions with
potential partners, there is no assurance that any agreements will result from
these discussions in a timely manner, or at all, or that
revenues generated from such an agreement will offset operating
expenses to enable us to meet our short term funding requirements.
In
addition to our efforts to enter into alliances and licensing agreements, we
plan to continue to seek access to the capital markets to fund our operations.
We filed a shelf registration statement in the amount of $40 million which was
declared effective by the Securities and Exchange Commission on November 25,
2008. Under the shelf registration statement we may offer from time-to-time, one
or more offerings of securities up to an aggregate public offering price of $40
million. However, the financial markets have been very difficult for companies
at our development stage and financial condition and financing may not be
available on favorable terms or at all. Additionally, we have received notice
from the NYSE Amex that we are not in compliance with continued listing
requirements. While we have provided the NYSE Amex with a plan to regain
compliance with applicable listing standards, our inability to maintain listing
our common stock on the NYSE Amex may further limit our ability to access the
capital markets. Delisting from NYSE Amex could also have other negative
results, including the potential loss of confidence by suppliers and employees,
the loss of institutional investor interest and fewer business development
opportunities. Any issuance of additional securities would be extremely dilutive
to the Company’s existing stockholders.
Our
failure to increase revenues or raise capital, including financial support from
partnerships or other collaborations prior to February 2010 would materially
adversely affect our business, financial condition and results of operations,
and could force us to reduce or cease operations. If we are forced to reduce or
cease our operations we may trigger additional obligations, including
contractual severance obligations aggregating as much as $975000. In addition,
we may be forced to liquidate assets at reduced levels due to our immediate
liquidity requirements. These conditions raise substantial doubt about our
ability to continue as a going concern. Consequently, the audit
report prepared by our independent registered public accounting firm relating to
our financial statements for the year ended December 31, 2008 included a going
concern explanatory paragraph.
Cash flows from operating
activities—Net cash used in operating activities for the nine months
ended September 30, 2009 was approximately $4.2 million compared to $2.2 million
for the nine months ended September 30, 2008. The nine months ended September
30, 2008 include a $4.0 million gain on our lease termination. Expenditures for
the nine months ended September 30, 2009 decreased substantially and operating
revenues decreased due to lower income.
Cash flows from investing
activities—Cash flows used in investing activities of $89,064 during the
nine months ended September 30, 2009 primarily represent payments made for
patent rights and the purchase of a new tablet press from an insurance
settlement related to our facility move. Cash flows used in investing activities
of $726,447 during the nine months ended September 30, 2008 primarily
represented the payments made for patent rights and $564,000 of restricted cash
associated with our facility lease.
Cash flows from financing
activities— Cash flows used by financing activities for the nine months
ended September 30, 2009 primarily represent payments of $111,119 made on our
term loan through April 2009, at which time the loan was paid off. In the nine
months ended September 30, 2008 cash flows used by financing activities
primarily represented payments made on our term loan offset by the proceeds from
the exercise of options and warrants.
As of
September 30, 2009, we had $1.8 million of working capital compared to $5.8
million as of December 31, 2008. We have accumulated net losses of
approximately $69.0 million from our inception through September 30, 2009. We
have funded our operations primarily through the issuance of equity securities,
including $3.6 million and $10.9 million in net proceeds from our registered
direct offerings in December 2007 and April 2006, respectively, and $14.1
million from our private placement in February 2005.
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended. Based on this evaluation, our principal executive officer and our
principal financial officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this quarterly
report.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting during the
third quarter of fiscal 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
Legal
Proceedings
|
We are
not a party to any material litigation.
Risk
Factors
|
Other
than the modification to the risk factors set forth below, there has not been a
material change to the risk factors as set forth in our Annual Report on Form
10-K for the year ended December 31, 2008.
We
do not have sufficient cash to fund the development of our product candidates or
maintain our operations. If we are unable to obtain additional financing by
February 2010, we will be required to substantially curtail or cease operations,
seek bankruptcy protection or otherwise wind up our business.
We
anticipate that, based on our current operating plan, our existing cash and cash
equivalents, together with expected royalties from third parties, we will be
able to fund our operations through February 2010. We are actively
managing our liquidity by limiting our clinical and development expenses to our
ibuprofen and pseudoephedrine products and supporting our existing alliances and
collaborations. If we are unable to increase revenues or raise additional
capital by February 2010 we will be required to substantially curtail or cease
operations, seek bankruptcy protection or otherwise wind up our
business.
We have
deferred all significant expenditures on new projects as well as major
expenditures for our lead products pending additional financing or partnership
support. In addition, we have reduced marketing and general and administrative
costs and continue to evaluate opportunities to reduce operating expenses. If we
are forced to reduce or cease our operations we may trigger additional
obligations, including executive severance obligations, which would further
negatively impact our liquidity and capital resources.
We are
pursuing new partnerships as well as opportunities to expand product sales and
other options that will enable us to obtain financing for our operations.
However, there are significant uncertainties as to our ability to be successful
in these efforts or access potential sources of capital. In addition, the
reduction in our marketing and business development activities will make it more
difficult to complete a strategic alliance. We may not be able to enter any
collaboration on terms acceptable to us, or at all, due to conditions in the
pharmaceutical industry or in the economy in general. Competition for such
arrangements is intense with many specialty pharmaceutical companies attempting
to secure alliances with more established pharmaceutical or consumer products
companies. Although we have been engaged in discussions with potential partners
there is no assurance that any agreements will result from these discussions in
a timely manner, or at all, or that any revenues would be sufficient to address
our capital needs. If we raise additional funds through strategic alliance or
licensing arrangements, we may be required to relinquish rights to certain of
our technologies or product candidates, or to grant licenses on terms that are
unfavorable to us, which could substantially reduce the value of our
business.
Additional
equity or debt financing may not be available to us on acceptable terms, or at
all. The capital markets have been experiencing extreme volatility and
disruption for over a year, and the market has been very negative for companies
in our industry and at our stage of development. The scope and extent of
difficulties in the capital markets could make it difficult or impossible to
raise capital and conditions may not improve in the amount of time left before
we reach the end of our financial resources. If we raise additional capital by
issuing equity securities, substantial dilution to our existing stockholders may
result which could decrease the market price of our common stock due to the sale
of a large number of shares of our common stock in the market, or the perception
that these sales could occur. These sales, or the perception of possible sales,
could also impair our ability to raise capital in the future. In addition, the
terms of any equity financing may adversely affect the rights of our existing
stockholders.
If we are
unable to increase revenues or obtain sufficient additional financing, we would
be unable to meet our obligations and we would be required to delay, reduce or
eliminate some or all of our business operations, including our drug delivery
development programs, prosecution of our intellectual property, and the pursuit
of licensing arrangements and strategic alliances. In addition, if we are unable
to meet our obligations to third parties as they become due, we may be subject
to litigation claims and/or may seek bankruptcy protection.
We
may be delisted from the NYSE Amex resulting in a more limited market for our
common stock.
On
September 15, 2009, we received notice that the NYSE Amex LLC (the “Exchange”)
had accepted our plan of compliance with respect to the previously reported
failure to comply with the Exchange’s continued listing standard set forth in
Section 1003a)(iii) of the NYSE Amex Company Guide. Such deficiency relates
to our failure to maintain stockholders’ equity of at least $6,000,000 and
because we have had losses from continuing operations and net losses in our five
most recent fiscal years . If we are not in compliance with the continued
listing standards within the appropriate time period, or if we do not make
progress consistent with the plan during the plan period, we may become subject
to delisting proceedings. Also on September 15, 2009, we received a separate
notice from the Exchange stating that we did not meet the continued listing
standard set forth in Section 1003(a)(iv) of the Company Guide because, based on
the Exchange’s review of our Form 10-Q for the period ending June 30, 2009, we
had sustained losses which are so substantial in relation to our overall
operations or our financial resources, or our financial condition had become so
impaired that it appeared questionable, in the opinion of the Exchange, as to
whether we will be able to continue operations and/or meet our obligations as
they mature. On October 15, 2009 we submitted additional information to the
Exchange to address how we plan to regain compliance with section 1003(a) (iv)
of the Company Guide by March 15, 2010. If the Exchange does not accept the
plan, or even if accepted, if we are not in compliance with the continued
listing standards at the end of the plan period or we do not make progress
consistent with the plan during such period, then the Exchange may initiate
delisting proceedings. If we are delisted from the NYSE Amex then our
common stock will trade, if at all, only on the over-the-counter markets, such
as the OTC Bulletin Board securities market, and then only if one or more
registered broker-dealer market makers comply with quotation requirements. In
addition, delisting of our common stock could further depress our stock price,
substantially limit the liquidity of our common stock and materially adversely
affect our ability to raise capital on terms acceptable to us, or at all.
Delisting from NYSE Amex could also have other negative results, including the
potential loss of confidence by suppliers and employees, the loss of
institutional investor interest and fewer business development
opportunities.
Other
Information
|
On
November 5, 2009, we entered into an agreement with Arden Realty Limited
Partnership amending its lease dated June 20, 2008 of office and laboratory
space at 19204 North Creek Parkway, Bothell, Washington. Under the
terms of the amended lease, we reduced the amount of leased space to 15,615
square feet from 20,468 square feet and reduced the rental payments to the
amounts set forth below. In addition, effective November 1, 2009, we
will be allowed to pay up to $18,000 of our monthly rent for twelve months
through draw downs on the letter of credit which secures the
lease. The remaining letter of credit (estimated to be $256,820 after
such reductions) shall remain in place through the lease termination date of
January 31, 2016.
The
remaining monthly rent is as follows:
Period
|
Monthly Basic Rental - Total
Premises
|
|||
November
1, 2009 – August 31, 2010
|
$25,684.60 | |||
September
1, 2010 – October 31, 2010
|
$26,444.60 | |||
November
1, 2010 – August 31, 2011
|
$26,444.60 | |||
September
1, 2011 – August 31, 2012
|
$27,249.67 | |||
September
1, 2012 – August 31, 2013
|
$28,009.67 | |||
September
1, 2013 – August 31, 2014
|
$28,904.13 | |||
September
1, 2014 – August 31, 2015
|
$29,775.21 | |||
September
1, 2015 – January 31, 2016
|
$30,669.67 |
Exhibits
|
The
following exhibits are filed herewith:
Incorporated
by Reference
|
||||||||||||||||||||
Exhibit No.
|
Description
|
Filed
Herewith
|
Form
|
Exhibit No.
|
File No.
|
Filing Date
|
||||||||||||||
10.1
|
Form
of Director Indemnification Agreement dated May 26, 2009
|
8-K
|
10.1
|
09860027
|
5/29/2009
|
|||||||||||||||
10.2
|
Form
of Officer Indemnification Agreement dated May 26, 2009
|
8-K
|
10.2
|
09860027
|
5/29/2009
|
|||||||||||||||
10.3
|
Separation
and Release of Claims Agreement dated August 28, 2009, between Bruce S.
Morra and the Company
|
X
|
||||||||||||||||||
10.4
|
Letter
Agreement Regarding Separation and Release of Claims Agreement dated
September 9, 2009, between Bruce S. Morra and the Company
|
X
|
||||||||||||||||||
10.5
|
Letter
Agreement Regarding Employment dated October 28, 2009, between Stephen J.
Turner and the Company, and between Richard M. Levy and the
Company
|
8-K
|
10.1
|
091152300
|
11/3/2009
|
|||||||||||||||
10.6
|
First
Amendment to Lease dated November 5, 2009, between Arden Realty Limited
Partnership and the Company
|
X
|
||||||||||||||||||
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of. 2002
|
X
|
||||||||||||||||||
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
X
|
||||||||||||||||||
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
X
|
||||||||||||||||||
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
X
|
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SCOLR
Pharma, Inc.
|
|||
By:
|
/s/ STEPHEN
J. TURNER
|
||
Date:
November 6, 2009
|
Stephen
J. Turner
|
||
President
and Chief Executive Officer
|
|||
(Principal
Executive Officer)
|
By:
|
/s/ RICHARD
M. LEVY
|
||
Date:
November 6, 2009
|
Richard
M. Levy
|
||
Chief
Financial Officer and Vice President - Finance
|
|||
(Principal
Financial Officer)
|
21
EXHIBIT
INDEX
Incorporated
by Reference
|
||||||||||||||||||||
Exhibit No.
|
Description
|
Filed
Herewith
|
Form
|
Exhibit No.
|
File No.
|
Filing Date
|
||||||||||||||
10.1
|
Form
of Director Indemnification Agreement dated May 26, 2009
|
8-K
|
10.1
|
09860027
|
5/29/2009
|
|||||||||||||||
10.2
|
Form
of Officer Indemnification Agreement dated May 26, 2009
|
8-K
|
10.2
|
09860027
|
5/29/2009
|
|||||||||||||||
10.3
|
Separation
and Release of Claims Agreement dated August 28, 2009, between Bruce S.
Morra and the Company
|
X
|
||||||||||||||||||
10.4
|
Letter
Agreement Regarding Separation and Release of Claims Agreement dated
September 9, 2009, between Bruce S. Morra and the Company
|
X
|
||||||||||||||||||
10.5
|
Letter
Agreement Regarding Employment dated October 28, 2009, between Stephen J.
Turner and the Company, and between Richard M. Levy and the
Company
|
8-K
|
10.1
|
091152300
|
11/3/2009
|
|||||||||||||||
10.6
|
First
Amendment to Lease dated November 5, 2009, between Arden Realty Limited
Partnership and the Company
|
X
|
||||||||||||||||||
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of. 2002
|
X
|
||||||||||||||||||
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
X
|
||||||||||||||||||
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
X
|
||||||||||||||||||
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
X
|
22